v10bern banking; commercial creditIWer ,u^ -3 "^ / Modern Banking; Commercial and Credit Paper (IN FIVE PARTS) By FREDERICK SILVER A New, Authoritative, and Standard Reference Work in Five Parts Coverino- the Entire Field Relative to Modern Banking and Credit Practice ; Bank Accep- tances ; Trade Acceptances ; Commercial Banking and Credits ; Banking Under the Federal Reserve; The Federal Reserve System with Amendments, Rul- ings, Regulations, Opinions of Counsel on the Subjects of Bank and Trade Acceptances and Commercial Banking to 1920; American and Foreign Discount Markets ; American and Foreign Credit Sys- tems ; etc., etc. Complete with Forms, Agreements, Records on the Subject of Acceptances, Commercial Banking and Credits; Dollar Credits for Financing Foreign Trade; Laws Relating to Negotiable Instruments, their Taxation ; Digest of Bill of Lading Laws ; U. S. Warehouse Laws and their Relation to Acceptances and Commercial Banking; In- vestments ; Foreign Financ- ing; etc., etc. The Commercial and Financial Institute of America New York City. To A. in measureless appreciation Of a spirit of accomplishment which comes from contact with a clear and helpful mind, this work is affectionately dedicated Feb. 23, 1920 Copyright, 1920 The Commercial and Financial Institute of America New York » I ' « " ' ' ' t . ' • • ICC let t > > • 4 * « « t C 1 « t • « c c < c < c < I « Cc «. c « c c X t t t t C t \ 1(1 tec C 4 I PLAN OF BOOK Introductory The plan in Part I of the book is to review, first, the simple pro- cedure in banking and credits; their development; their relation to the subject of money, and to give an analysis of the meaning and utility of credit. A treatise on the banking system of the United States before the adoption of the Federal Reserve System is given for the purpose of drawing a comparison with the Federal Reserve System following. The principles and operation of the Federal Reserve are briefly but interestingly outlined in their particular relation to com- mercial banking practice and to the rapidly growing American dis- count market. The banking and credit systems of England, France and Germany cc should be found very helpful and of interest to the study and to the cc application of the acceptance method in commercial banking and credit 33 practice. Part II treats of the trade and bank acceptance and their importance to modern day commerce and finance. Therein are reviewed many im- ^ portant topics comparatively new to American banking and business. ?*■ The history of the acceptance, its re-introduction into the system of H American credit and finance, its practical utility in the conduct of § American business, its advantages to the buyer, seller, retailer, banker, investor and to the national interest, the American discount market, discount corporations, expressions and opinions by specialists on the acce'")tance method, and general conclusions as to the need for co-op- eration by all interests concerned, are the main features of Part the Second. The operation of bank acceptances, dollar credits, invest- ments and other topics, as for instance, "Procedure in the Use of Acceptances, Plans, Publicity, etc.," should prove of interest. By far the most important improvement in commercial banking practice has been the equal development of standardized commercial paper, principally the trade and bank acceptance as important elements of the American credit system. The Federal Reserve Board, through its few years of operation, has broadened the scope of banking activity by the admission and standardization of commercial paper. For this reason, there is given practically all there is to the subject of Accep- tances, and Commercial Banking Practice under the Federal Reserve. The Amendments to the Federal Reserve Act, the Rulings and Regu- lations of the Board, Opinions of Counsel, General Statutory Pro- visions, to 1920, covering Bank and Trade Acceptances, Discounts and Re-discounts, Advances, Open Market Transactions and Investments are of great importance as a reference work. Part IV is an embodiment of the most approved forms and agree- ments on bank and trade acceptances and commercial l)anking practice. Each form is explained to the best detail, and having the 38S146 4- Plan of Book stamp of approval of the leading commercial and financial bodies of the country, is available for use by commercial and banking establish- ments. Part V contains a collection of laws relating to acceptances and commercial banking. The Negotiable Instruments Law should be of particular importance as a legal reference on the subject. The United States Warehouse Act, with headings, is given, as an aid to the sub- ject of bank and trade acceptances. A Digest of the Federal Bill of Lading Act is also given for purposes of reference. The chapter on the Taxation of Negotiable Instruments is most complete as an analysis in the fullest detail. It will serve to clear up many doubtful questions that have arisen or may arise in connection with the taxa- tion under the present Federal Revenue Laws of negotiable com- mercial paper. Lastly, there is reviewed the Edge Act for Foreign Financing making possible a more extensive credit and banking pro- gramme abroad. It is hoped that this important amendment to the Federal Reserve Act will prove of great benefit to the Nation and to the further development and extension of its foreign commerce. In presenting the subjects of "Modern Banking and Credit Prac- tice," "Bank and Trade Acceptances," and "Commercial Banking and ^ Credits,' " under the present banking system, the author feels that it^ will meet the needs of the practical business man and the banker of^ the country by giving additional light upon these important subjects and by outlining their usefulness and importance to the manufacturer, producer, the merchants, both buyer and seller, the exporter, the im- porter, the banker, the investor and the public in general. In preparing this work, the author has not had the advantages of others writing on different topics of banking and credits, the fields of which are much more developed, and upon which a good deal has already been written. The available matter on Acceptances and the newer banking and credit subjects is very limited even to date, and, with the exception of a few phamplets issued by the larger banks, the discussions contained in which are very helpful to a study of the relative subjects nothing of note has been availed of. In the majority of cases, research has been found necessary by a study of actual methods as at present practiced. It is hoped that this work will prove a useful addition to the bank and commercial library, as well as to the banker, the business man and student of commercial and financial methods. New York, 1920. FREDERICK SILVER. CONTENTS AND INDEX PART I CHAPTER I Money, Banking and Credits Page Money, Banking and Credits 33 Commerce in the primitive ages 35 Barter of commodities 35 Other mediums of exchange — commodities and precious metals 35 Employment of gold and silver 35 Introduction of credit 36 Goldsmiths as custodians of money and valuables 36 Rise of modern banking 36 Development of credit system 36 Definition of credit 36 Analysis of credit Z7 Credit a substitute for money 37 Confidence and futurity both elements of credit 37 Functions of credit 37 The Various Kinds of Credit 38 Various kinds of credit 38 Public credit 38 Capital credit 39 "Capital investments" not capital credit 39 Mercantile credit 39 Personal or individual credit 39 Consumption credit 39 Retail credit 39 Banking or commercial credit 39 Significance of commercial credit 40 Credit used more than actual money 40 Banking — Various Classes of Banking Institutions 40 The savings bank 40 Character of savings institutions 40 Economic importance of savings banks 40 Services rendered by savings banks 40 The investment banker 41 Character of the investment banker 41 Importance of the investment banker 41 I 2 Contents and Index Page Services rendered by the investment banker 41 Commercial banks 41 Character of commercial banks 41 Importance of commercial banks to modern day commerce 42 Operations of commercial banks different from savings or investment banks 42 I'he Functions of Commercial Credit 42 Business of commercial banks 42 Loans and discounts 42 Deposits 43 Note issues 43 Process of discounting 43 Analysis of above process 44 Cession of right to demand a present sum for a future payment 44 An exchange of rights 44 In discounting 44 In deposits 44 In collection items — another means of making a deposit 44 In bills of exchange 44 In bank note issues 44 The Services and Functions of a Bank 45 Purposes for which banks are utilized 45 Place where funds may be lodged with greater safety 45 Evils existing in keeping of valuables by oneself eliminated by bank 45 Interest on deposits 45 Utilization of funds otherwise unproductive 45 Advances and loans 45 Bank credit a means of augmenting one's wealth 45 Transmission of money 46 Risk element in handling of money eliminated 46 Supply of money available to public in any denomination 46 Need for money lessened by bank always having it for use of public 46 Eliminates costly handling of money 46 Banks' collection services valuable aid to businessmen. 46 As guardians of legal rights in connection with above 46 Bank connection gives business reputation 47 Bank connection increases credit standing 47 Enables the keeping of authentic records 47 As an educator of banking customs and better business methods 48 Advisors as to business methods and credits 48 Makes for better morals, produces honesty and punctuality 48 CHAPTER II The American Banking and Credit System Before the Passage of the Federal Reserve Act Kinds of Banking in the United States 49 Contents and Index 3 Page Supervision and regulation 49 National Banks 49 Introduction of National Banking System ; purposes ; 49 Organization of the National Banking System before the adoption of the Federal Reserve 50 Capital requirements ; shares and dividends 50 Management of National Banks ; powers and limitations 50 Reserve requirements 51 Note issues 51 Government supervision 51 Business conducted by National Banks 52 The Organization, Management and Supervision of State Banks, Trust Com- panies and Savings Institutions 52 Character of business 52 Legislation ; State banks 52 Supervision of State banks 52 Character of foreign business conducted by State banks 53 Private Banks 53 Character of private banks 53 Operations of private banks 53 The Investment Banker 53 Character of investment banker 54 Operations of investment banker 54 Wider field permitted by law 54 The Commercial Paper Dealer and Broker 54 Character of commercial paper dealer and broker 54 Kinds of business conducted by them 54 Operations of the commercial paper broker 54 Resume of the American Banking and Credit System as It Existed before the Introduction of the Federal Reserve System 54 Scattered reserves 55 Effect of State Laws upon reserves 56 Immobility of reserves 56 Bank note only means of credit expansion and contraction 56 Cooperation among banks lacking 56 No system of domestic exchanges 56 No system of foreign banking operations 57 Commercial paper not of standardized character 57 Limited means for employment of funds 57 Absence of a broad discount market 57 Lack of equality in credit facilities 58 No agency to assist in stability of rates 58 System of credit expansion poor 58 Uniform publicity in supervision absent 58 No foreign banking facilities 58 Defects in loaning system 58 4 Contents and Index Pace Defects in treasury system 59 The National Monetary Commission and the Aldrich-Vreeland Bill 59 CHAPTER III Banking in the United States Under the Federal Reserve System The Federal Reserve System 60 Introduction of the System ; effect 60 Organization of the Federal Reserve, centralized banking 60 The Federal Reserve; organization and management 61 Federal Reserve Board heads system 61 Operation of the Federal Reserve System 61 The centralization and mobilization of district bank reserves 61 Use of reserve money by Federal Reserve Banks 62 Inter-district and intra-district mobility of reserves 62 Inter-district Mobility of Reserves 62 Rediscount operations of Reserve Banks 63 Advances by one Federal Reserve Bank to another 63 Open market operations 63 Discount markets for commercial paper 63 The trade acceptance 64 The bank acceptance 65 Intra-district Mobility of Reserves 65 The System of Credit Expansion Through Federal Reserve Notes 66 Issuance o f National bank notes by banks 66 Provisions of Federal Reserve re note issues 66 Character of commercial paper 67 Security in the form of gold 67 Expansion and contraction of Reserve notes 67 Collateral Loans 68 Circulation and Contraction of Credit 68 The Domestic Clearing System 69 Federal Reserve Banks as clearing houses for members 69 Operation of the clearings system 69 The Gold Settlement Fund 69 Operation of Gold Settlement Fund 69 How settlements are effected 70 Financing Foreign Trade — Dollar Exchange 70 Dollar exchange provided for by Act 70 Dollar credits come into use 70 Importance of dollar credits to Amercian importer 70 Establishment of foreign agencies 71 The Federal Reserve System and the Federal Treasury 71 Functions of the Federal Reserve System 71 Contents and Index 5 CHAPTER IV Banking and Credits in Europe Page The Banking and Credit System of England, France and Germany 75 Introduction "jy The Development of English Commerce and Finance TJ Early stages of development yj England becomes a financial center 78 The pound sterling 78 Banking and Credits in England 78 Bank of England the Central Banking Institution 78 Organization of the English Banking System ; Reserves 79 The Bank of England 79 Joint Stock Banks ; Branch Banking 79 Private Bankers ; Merchant Banks ; Acceptance Firms 80 Discount Houses 80 Investing and Finance Houses 80 Commercial Paper in England 80 Classes of Eligible Bills 80 Bank and Trade Acceptances the Chief Forms of Commercial Paper in Eng- land 81 Bank Acceptances used most extensively 81 Trade Acceptances a most important form of commercial credit 81 Other Classes of Commercial Paper and Acceptances 82 The documentary bill of exchange 82 Bills of exchange 82 Bills of exchange ; how classified 82 Demand and sight bills ; short and long bills 82 Prime bills ; ordinary bills 82 Grain, cotton and finance bills ; documentary bills 83 Documentary acceptance and documentary payment bills 83 Clean and secured bills of exchange 83 Finance bill 84 Commercial letters of credit 84 Advances on consignments 85 The London Discount Market 85 What comprises the great London money and discount market 86 Watchfulness of British Banks 86 Bank of England discount rate 86 The Banking and Credit System of France 87 The Bank of France ; creation 87 Operation of the Bank of France ; reserves 87 Credit Societies ; their operation 87 Private banks ; their operations 88 The French Credit System 88 6 Contents and Index Pack Services of the Bank of France 88 Credits in France ; classes of eligible paper ; paper discountable 88 The Extensive Use of Acceptances Over the Open Account Method in France. 89 Superiority of the acceptance and bill of exchange 89 The Banking and Credit System of Germany 89 The German Reichbank ; its operation 89 The Cartorium ; Decktorium ; and Central Auschuss 89 Branch banking through the Reichbank ; reserves 90 Incorporated banks 90 Importance of the Reichbank 90 Long term credits ; their benefits 90 The Use of Acceptances in Germany 91 The bank and trade acceptance 91 Relation of German banking to industry, credits 91 The bank acceptance ; how created 91 Method of Financing German Trade 91 PART II ACCEPTANCES (Page 93) Their Importance in the Fields of Domestic and International Trade and Commerce, and as a Means of Creating Better Business and Credit Methods for the Country. An Extended Survey of the Acceptance, Its Merits and Demerits, Practical Uses, Benefits to the Business Community, the Business Man, THE Banker, the Investor, and the Country. Forms, Plans, Methods of Handling Acceptances, Ways and Means Used to Encourage Their Use, a Consensus of Opinion by the Leading Associations and Organizations. CHAPTER V Introductory Historical Aspect of the Acceptance — Its Use in Europe and the United States 95 EflFect of Great War on business 95 American business man hard to convince . . .• 95 New methods looked upon with suspicion 95 The American in the field of specialization 9^ Importance of improved methods not to be overlooked 9 3 PUR( BASEC ACCEPT THIS BILL PAYABLE AT ANrf_BANK By NKER C S TRUSn COMPA -Hf IN Tl K IMtTEO STATBS WHICH HE MAT OeSUMMS < i ft < a < a, PA r TO THE ORDER OF OURSELVES JDOLLARS ($_ GOODS FROM THE DRAWE]<. THE DRAWEE tMV (MGMAnJKS or OBAVttO (QTT or MtAWSSt BY. A trade acceptance saves the transmission of cash and enables the creditor not only to arrange the definite date of payment with the Commercial Banking and Credits 159 debtor, but, if necessary, to secure the use of a sum practically the equivalent of the debt long before the debt is due in the ordinary course of business. Ask for full information concerning this better method of financing sales of merchandise. FIRST NATIONAL BANK IN BROOKLYN Broadway and Havemeyer Streets Another form of letter used by the same bank to encourage the use of acceptances : First National Bank In Brooklyn Dear Sir: — At this time when ever}'' dollar of cash and credit counts in speeding up production the trade acceptance makes capital more eflfective. Many of our customers have been bringing trade acceptances to us for discount which have been given by customers of theirs in pay- ment of merchandise. They tell us that they find this method very satisfactory for themselves and for their customers. We believe that in order to get all the advantages of trade accep- tances their use should become general, but in order to accomplish this it necessarily becomes a give and take proposition. Won't you therefore, when asked by your customers to give accep- tances, kindly give them, for in so doing you will greatly encourage this up-to-date-method of financing business. Thanking you for your cooperation, we are, Very respectfully, (Signed) William S. Irish, Vice-President. Another form of publicity used by this bank follows : First National Bank In Brooklyn Dear Sir : — There are many advantages in the use of the trade acceptance, a specimen of which is enclosed herewith. For example, suppose you are a wholesaler and in selling goods to a customer on credit, instead of charging the purchase against him on your books, it is agreed between you that you draw a bill on him for the proper amount, payable in 30, 60 or 90 days. When "accepted" by the buyer (that is, when he signs his name in the blank provided for it across the end of the draft) the bill becomes i6o Bank and Trade Acceptances a "trade acceptance" and may be discounted at your bank, which, if it is a member of the Federal Reserve System, may rediscount it with the Federal Reserve Bank. Thus, an account that ordinarily would have to be carried on your ledger until maturity is converted into "commercial paper" which, in turn, may be converted into cash. The First National Bank wants to assist all it can in the develop- ment of the trade acceptance plan at this time. We feel that it is not only a profitable method, but also a patriotic service for every business man to conduct his business transactions in such a manner as will keep his resources available for immediate use, when our country must employ all possible capital and credit. We should be very glad to explain to you more fully just how trade acceptances will help you, whether you are a buyer or a seller. Yours truly, (Signed) William S. Irish, Vice-President. CHAPTER XV Progress in the Acceptance Method FOR AND AGAINST Expressions and Opinions From the Leading Commercial and Financial Organisations, the Govern- ment, the Bankers and Specialists on the Acceptance Method Herewith are reviewed the opinions and expressions of some of the leading commercial and financial organizations, the Government, bank- ers and specialists on the acceptance method, qualified to speak upon the subject. Also, there are given extracts from some of the leading articles on acceptances, as well as extracts from the speeches of the leading pro- ponents of the acceptance method. These may be taken as conclusive evidence of the practicability of the acceptance from those who have studied it from every angle and who have proved to themselves that it is far better than any credit system that has ever been devised. It has been estimated by the leading credit associations of the country that at the present time more than ten thousand firms and business establishments are users of the acceptance in one form or another. The American Acceptance Council, an organization especially ex- isting for the furtherance of the acceptance method, estimates that there are more than that number of users. Nationwide investigations conducted in the interests of better busi- ness for the country show that in those cases where the acceptance has been put to the test, rarely has it failed to supply the desired results. Not only is the acceptance of benefit to its present users, but it holds out equal advantages for the country's business in general. True i6i i62 Bank and Trade Acceptances it is that the acceptance method is not intended to eliminate all other forms of banking credit, for, in some lines of business, its use would be to confuse existing- methods rather than to aid them. The accep- tance is not intended as a substitution for all prior methods. It is, on the other hand, an improvement in credit methods. If the acceptance could save for the merchant but a small fraction of a per cent, of the annual turnovers in business, in costly account carry- ing, in frozen liquid accounts, tied up and awaiting settlement, in tied up capital, in lost motion, in extra expense of conducting business, in bad debts, in slow collections and other evils; if it could be the means of an open discount market capable of absorbing the commer- cial paper produced by the country's business, thereby creating liquid- ity in the nation's resources, and be a means of extending financial equilibrium at all times, with the cheapening of money and its advan- tages to business, — can we not say that the acceptance is a national asset — a means of conserving the national resources? Let us see what the following say: From the Government The following interesting letter was received from Governor W. P. G. Harding of the Federal Reserve Board by the American Acceptance Council, and expresses clearly the attitude of that highest of financial tribunals in the country towards the trade acceptance method : ^'To THE American Acceptance Council, New York: "The Board is advised by letter from your Executive Secretary, dated October 22nd, that the American Acceptance Council, organized to encourage the use of bankers' and trade acceptances, is at this time conducting a campaign in the interests of trade acceptances. "Your activities in this connection are observed by the Board with satisfaction. It is a matter of public knowledge, justified by frequent and emphatic expressions from the Board, that the purposes of the Federal Reserve Act would in many cases be better served by the gen- eral adoption of trade acceptances in lieu of book accounts and 'one name' paper. The acceptance has the added security of a second name, it usually evidences upon its face that it represents a commercial, in- dustrial or agricultural transaction, and gives reasonable assurance that it will be liquidated at maturity by proceeds from the sale of the identical goods involved. For these reasons, the Board believes that this class of credit instrument is often more desirable than single name paper as an investment for the funds of the Federal Reserve banks. Commercial Banking and Credits 163 and has backed this belief by authorizing a preferential rate for trade acceptances, "There are, of course, some branches and kinds of business which are not adaptable to the use of trade acceptances, and the question of such adaptability must be left to the judgment of those interested. The Board does not undertake to urge the use of the trade acceptance against the wishes of interested parties, but merely takes the view that the trade acceptance represents generally a convenient and scien- tific kind of credit instrument and has no hesitancy in recommending that it be utilized wherever practicable. "Very truly yours, "(Signed) W. P. G. HARDING, "Governor." From the Commercial, Financial and Credit Organizations At the 24th annual convention of The National Association of Credit Men, held in Detroit, on June loth to 13th, 1919, the following resolutions were recommended in a report presented by its Committee on Banking and Currency : "Resolved, That the National Association of Credit Men hereby re- affirms the action of former conventions in approving the principles of the trade acceptances as a desirable credit instrument for the ordi- nary commercial transactions of the nation, believing that the trade acceptance is superior to the open book account, that it is a logical development of the Federal Reserve Act in the emphasis and dignity it gives to commercial paper as a national asset, and that it will tend to decrease trade abuses, give greater liquidity to capital, and there- fore should be known and used generally in mercantile credits. "Resolved, That in the approval given by this convention to the trade acceptance, it is earnestly recommended that in the literature of the National Association and local associations, and in the activities of succeeding committees, this be the attitude taken — that wherever the trade acceptance is found adaptable and can be used to advantage by the credit grantor, he be encouraged to use it without restraint or criticism ; that those who do not find it adaptable or of economic advan- tage at this time in their credit transactions be not required to use it; the convention believing that such attitude will permit the subject to receive study and consideration without any rancor and those insinua- tions that would impeach the intelligence of one either favorably or unfavorably inclined toward the instrument." From the American Bankers Committee on Acceptances The list of known users of the Trade Acceptance has grown rapidly, having increased over four thousand in the period of one year. It in- 1 64 Bank and Trade Acceptances eludes practically every line of industry and all sections of the United States. Out of the reports received not one single valid objection has been presented where proper use of the Trade Acceptance has been undertaken. In every legitimate case the instrument is praised most highly. Experience has actually demonstrated that the use of the Trade Acceptance enables an equal amount of capital to do a greater amount of service. It has also enabled its users to reduce their bills payable account, to buy a greater amount of Treasury Bills and to handle without difficulty the increasing volume of their business with the attending high prices, to shorten the credit period, to reduce the number of claims and disputes, to afiford a definite check-up on all transactions, and to generally stabilize their business — producing at the same time a great volume of liquid paper, eligible for rediscount at the Federal Reserve banks and for service as the basis of currency issue. The following paragraphs are taken from the recommendation of the Chamber of Commerce of the State of New York, one of the old- est organizations of the kind in existence and noted for the sound and conservative quality of its judgment, on the Trade Acceptance : "A new step of importance to the development of the Federal Re- serve System will be the adoption by merchants of the method of settling accounts by Trade Acceptances. Your Committee desires to give its approval to the principle involved in this method of settling accounts between sellers and buyers. It believes that merchants throughout the country should be encouraged in every way to study the question of Trade Acceptances and to bring the matter to the attention of their customers. The introduction of new methods of business of this description requires time and patience, in order that those adopting them may become thoroughly familiar with their methods and with the benefits to be derived therefrom." From Proponents of the Acceptance Method Paul M. Warburg, chairman of the Executive Committee of the American Acceptance Council, made the following statement of prin- ciples relative to trade acceptances at the first meeting of the Execu- tive Committee of the Council on April 14th, 1919: "We are preaching the gospel of the trade acceptance for no other purpose than that we believe its use makes for sounder business and banking conditions. "We do not say that single name paper is not good, or illiquid ; but we may fairly say that the trade acceptance is better and more liquid. Commercial Banking and Credits 165 "We do not say that the trade acceptance serves all purposes and that all cash sales and all cash discounts ought to be avoided ; but we do say that where business is not done on a strictly cash basis, the trade acceptance will be found the safer, sounder, and in the long- run, more economical method than the open accounts. "Indeed we believe that it is so much of an improvement over the open account that in some cases sellers, at present sacrificing a very heavy cash discount for the purpose of avoiding the dangers and incon- veniences of open accounts, might find it to their advantage to con- sider the economy involved in the use of the trade acceptance when dealing with customers of strong credit. "We do not want to appear as wishing to force upon anybody the adoption of the trade acceptance, unless he considers it as serving his better interest. W^e do wish, however, those who can profit from the method to study it carefully and not to hesitate to adopt it. "The American Acceptance Council's interest in the matter is that whatever makes for better morals in business and for better credit and banking conditions is a decided benefit to the United States." In the banker the acceptance should find an enthusiastic friend. From purely business considerations its merit should appeal to him powerfully. To him and his interests — its general use would mean a better business tone, higher business morality, safer business risks, sounder assets, cleaner commercial paper, greater liquidity, a broader scope of usefulness, and the diverting to the bank of profitable business functions which logically belong there, but which at present, under the antiquated and inequitable open-book account method of treating credits, are performed by the seller of merchandise not only without profit, but to his distinct disadvantage. The business man who now sells upon open-book account, and who suffers from the injustice which follows its use by his customers, should hail with delight the relief suggested in the coming of the acceptance. None can realize as he the awkwardness and even danger of trade burdens which had their origin in bad business practice and which find their only justification in the sorry fact that business weakly allows itself to tolerate them. Why the manufacturer or dealer will allow his perfectly good capital to be tied up in frozen book accounts for unreasonable periods of time, determined by the whim of the buyer, when in the use of the trade acceptance there is suggested a means whereby each transaction virtually will finance itself, and be paid definitely at maturity, is a thing difficult to reconcile with the conceded cleverness of the American business man. It is difficult to understand, too, why this class of business men should tolerate open-book account evils in the form of indefiniteness, overdue obligations, bad debt and interest losses, disturbance of profit calculations, collection annoyances and cxi)ense, and the rest of a long 1 66 Bank and Trade Acceptances list of undesirables — when every proper protection for their credit interests is provided in the acceptance method. The interest of the buyer of merchandise in the acceptance, although perhaps less clearly apparent than that of banker and seller, neverthe- less is a substantial one, particularly in view of the fact that in the series of commercial processes which extends from production to con- sumption, every buyer but the last is a seller, and every seller but the first a buyer. In this way every buyer except the ultimate consumer buys that he may sell, and hence in his attitude toward the acceptance both points of view must be included, (From an address by Mr. Lewis E. Pierson, President of the Irving National Bank). D, C. Wills, Chairman, Federal Reserve Bank of Cleveland, says : "Trade acceptances automatically furnish that highest class of credit data, namely accurate information, enabling bankers to estimate more intelligently the responsibility of their borrowers. A high grade trade acceptance will find a wide market. "Every time a trade acceptance is substituted for a promissory note based on the mixed and undefined credit of the maker or for a book credit of still more ambiguous character, a step has been taken toward the ideal of sound trade credit." A TRADE ACCEPTANCE REVIEW By Robert H. Bean Executive Secretary American Acceptance Council The elevation of acceptance credits to a position second only to cash is an accomplishment of the first year of the new era in American business methods following the world war. The necessity of a change from the time-worn open account system of settling for merchandise purchased on credit has been recognized for several years. A pre- liminary agitation and discussion to bring this about has been carried on with special emphasis during the past twelve months by industrial and financial organizations throughout the country. Trade and bankers acceptances are an established fact in the opera- tion of our domestic and foreign trade. No change of whatever merit in our system of business or finance has ever or will take place without opposition. The arguments of early opponents to this system, based as they were on the idea that the old methods were good enough, have been long since met by sounder logic founded on the analysis of mod- ern day needs, and the proponents of such arguments have steadily decreased in numbers. Commercial Banking and Credits 167 The custom of selling merchandise on time and carrying the charges on open account had been so long in vogue that many did not recog- nize the merit of a system that would release for other purposes the more than four billion dollars tied up in frozen, illiquid open account credits. Far-seeing and open-minded students of the commercial and financial needs of the new America, however, recognized at a date closely following the action of the Federal Reserve Board that in the fullest development ofthis economically sound system of finance lay tremendous possibilities. The very small number of users of accep- tances from 1915 to 1917 has increased to many thousands, made up of merchandising concerns in all parts of the country. The basic principle underlying the use of the acceptance method of settling accounts is that it will bring about the improvement of the credit position of the individual, corporation, community and nation. That such a condition is the goal of business men and bankers through- out the world should be acknowledged without question. Next to the cash discount system it commands the highest regard, and, contrary to the impression of some, the trade acceptance method need not in- terfere in the slightest with the system of paying cash within a stated period and taking a discount for it. It is not claimed by the proponents of the acceptance method that acceptances can be used with equal facility in every kind of business. In fact, it is admitted that it may not be to advantage of some kinds of business to use this system, but it is claimed that for a very large part of the commercial interests of this country the acceptance system can be used with remarkable success. It is not a cure-all for every defect in the nation's credit machinery. There is no mystery about a trade acceptance, neither is there any magic by which a bad account will be made good or relieve the necessity for continued careful scrutiny of credits by the credit departments of business houses and banks. It is simply an acknowledgment of a debt and its execution reflects credit upon the buyer as well as the seller and is the evidence of a well-organized, carefully managed business. The American Acceptance Council has found that the acceptance method of financing is now used to some extent in practically every kind of business where goods are sold outright and where sales terms are other than cash. Many national associations of wholesalers and retailers have endorsed the system and have recommended its use by members. The American Bankers Association at its last convention reaffirmed its stand on acceptances and provided for the appointment of committees composed of business men and bankers who are to make a study of the entire question, work out a system of handling acceptances in banks and business houses, and to determine upon a reasonable charge for collection, exchange and service by banks to which these items pass for payment. The volume of bankers acceptances has increased with each suc- ceeding month, and remarkable headway has been made in the estab- i68 Bank and Trade Acceptances lishment of an open discount market in this country similar to that which has been in existence in England and the continent for genera- tions. As the bankers in smaller cities realize the investment possibilities of this class of paper, there will be a greater desire on their part to familiarize themselves not only with the bills offered for purchase but the circumstances surrounding their creation and the rates which they demand. There is nothing temporarily or transitory about the acceptance system. It has been carefully studied by our financiers for several years, and that it fits in with our plan of readjustment after the extra- ordinary conditions through which we have passed is the combined thought of the ablest minds in our financial and industrial affairs. The remarkable success in developing trade and industry in Eng- land and other European countries may be laid to the policy followed by bankers and business men in those countries to seek out and apply those principles which work for the greatest benefit to the commerce of the country rather than to that plan which will yield in dollars the greatest immediate return. The demand which we face at this time is for the fullest use of our resources, and this can best be done by releasing a greater amount, if possible, of illiquid and tied up credits. From reports gathered throughout this past year by the American Acceptance Council, it is safe to say that the progress thus far made, and the promise of still greater development in the use and operation of trade and bankers acceptances, augur well for the future prosperity of the commerce of this country. THE OTHER SIDE OF THE QUESTION In order to present both sides of the question on the use of trade acceptances, the following letter written by the assistant treasurer of a large manufacturing company in the United States is given. It should not be construed that the acceptance method is impracticable for similar lines of business, as the letter merely expresses a view- point as to its limitations. The last paragraph contained in this letter tells the story. However, it has been found in the past, and bankers and large business houses have testified to the fact, that it is the larger corporations, the resources of which are tremendous and which do not require borrowing, doing business on practically a cash basis, that find very little use for the trade acceptance. These large corporations do not care to give any trade acceptances for they virtually control the situation. In a letter received by the Institute, another manufac- CoMMERaAL Banking and Credits 169' turing firm states that it is due to these larger corporations that the acceptance method, which is conceded by the highest commercial and financial interests of the country to be of most good, is retarded in its development. This firm states that activities directed to the develop- ment of the acceptance method should start with these firms first. As you know, we are definitely committed to the granting of an unusually large cash discount. Our 5 per cent, cash discount, which is a part of our terms for all branches of our line, is equalled only by the cash discount granted on a few special lines in the garment field. You are familiar with the reasons for the granting of this unusually large cash discount. Since we are dealing largely with merchants of limited capital, we do everything that we can to make a man turn his capital often. The primary purpose of the trade acceptance movement is to expand the credit structure of the nation. Of course this expansion does not in any way increase the actual amount of wealth. What we strive to do with our long cash discount is to make a man turn his capital frequently and it follows that every time that he turns his capital and makes a profit it is producing wealth. From the standpoint of the national interest in the present emer- gency, it has been held by a dozen or more of the country's largest bankers, to whom our particular problem has been submitted in detail, that we serve the country better by making our customers' dollars work overtime than we would by deferring payments and lengthening terms, in accordance with the trade acceptance plan. Looking at this question from a standpoint solely of the interests of the Company, there are several things to be considered : First of all, the acceptance plan has been devised to assist the man whose results in handling open accounts have been just average, or less than average. It so happens that our results, over a period of years, have been very much better than the average. Our accounts receivable are not uncertain ; our losses are negligible ; our cash discount terms are enforced in all of our dealings with all of our customers. If we are to put into operation a system, which is planned to bring up the man who has been getting poor results to a level where he can expect average returns, we actually will have to bring ourselves down to a lower level than that upon which we have been doing business. This is just a matter of mathematics. We are not taking credit to ourselves, be- cause our collection results have been exceptionally good (we know that they can be better), but we do not care to lose any of our "punch" merely because a lot of other fellows have slow accounts and cannot enforce cash discount terms. If we were to make a general use of trade acceptances, we probably could discount those acceptances and in this way borrow money at a figure slightly under the current market rate for single name paper. 170 Bank and Trade Acceptances At the same time, if we did this we would be merely borrowing money on the name of Company, so far as most of the acceptances might be concerned, because we have very few customers whose names on the pieces of commercial paper would mean anything as a basis for borrowing from our banks in New York, Philadelphia, Boston, or Chicago. Furthermore, it would be necessary to create a special department to handle these acceptances. The maintenance of such a department would represent a considerable item of expense. It would also be necessary to set up and to keep up a reserve to pay discounted accep- tances which our customers did not meet when they came due. The interest on this reserve alone would more than eat up the slight saving in the cost of borrowed money secured on acceptances. It must be borne in mind also, that if we were to use acceptances regularly throughout the year, we would face a necessary lengthening of our terms. We could not profitably arrange to discount and redis- count customers' paper which would run for less than 60 days. This would react directly upon the Credit Department, because, instead of being in a position to shut off upon a man when he did not take advan- tage of his cash discount for a single month's purchases, our cash dis- count would be eliminated and we would have no excuse for shutting off deliveries until a man failed to meet his first acceptance at the end of 60, or possibly even 90 days. The credit men also would face the problem of handling customers who would give acceptances, sincerely believing that these accep- tances represented cash and actually paid their accounts. For ex- ample, a dealer, with a credit limit of $5,000 would order $5,000 worth of goods from us, under the dating proposition, in January and would give us an acceptance for $5,000 when the goods were delivered. It would be a very difficult thing for us to convince that dealer that by giving us his name on a piece of paper he had not actually paid his bill. If he were to give us an acceptance, it would be nothing more than natural for him to expect to come right in to order and receive another $5,000 worth of goods on open account. Of course the acceptance would merely serve as a basis for borrowing and the transaction would produce no money except such money as the Company would borrow and pay for. The customer's account would not be settled until the acceptance cleared at his bank on the due date. If, after taking his $5,000 acceptance we were to give him another $5,000 worth of goods on open account, we merely would be doubling his limit with- out any sort of security. From the standpoint of the Company alone, therefore, the use of the trade acceptance would involve additional operating detail and additional expense, with an actual slowing up of our collection meth- ods and an increase in risks. From the standpoint of the salesmen in the field, the trade accep- tance is a mean thing to handle, because at the time he takes the Commercial Banking and Credits 171 order the salesman is compelling the buyer to think definitely and specifically about paying the bill. The chances are if an order is taken for a thousand dollars and then the salesman asks the customer to sign an acceptance for a thousand dollars, that in many cases the customer will wish to be on the safe side of things and will actually cut down the amount of the order placed with us. Further, if we are to place upon the salesman in the field the burden of explaining a trade accep- tance plan to customers, we are going to make it necessary for him to spend a good part of his time selling this part of the program to cus- tomers — the time which might otherwise be devoted directly to pro- ducing orders. When the proposition is viewed from the standpoint of the customer, there is just one question to be asked and answered. Why should any customer who has regularly discounted his bills, give to the Company a trade acceptance, unless conditions have so changed that we actually need that customer's assistance in financing his purchases through a dating period? When we ask the customer for an accep- tance, we give him nothing in return for it — it is just an additional consideration that he is showing us. If we are dealing with customers who live up to the contracts that they make and if we see to it that they do live up to these contracts, the acceptance would give to the customer nothing that he does not already have, and, as many cus- tomers will persist in viewing it, would be merely requiring the cus- tomer to give some form of "security" as a guarantee that he will pay his bills when he says he will. If a customer always has maintained a clean discount record with us it would be a little bit hard for him to figure out why we should require, at the present tinte from him, more than we have in the past. We believe that the trade acceptance is an excellent thing for the concern of limited capital doing business with established corpora- tions, whose names on acceptances will be a direct addition to the borrowing power of the people to whom the acceptances are given. We believe in acceptances for houses selling goods on very long terms to customers who are not in the habit of paying promptly, also for houses that have found open accounts to be "a very uncertain thing^' and for those houses who experience great difficulty in enforcing cash discount terms. CHAPTER XVI IMPORTANCE OF THE ACCEPTANCE TO THE NATIONAL INTEREST Modernization of the Credit Structure The high quality of the bank and trade acceptance as commercial paper lias induced the Federal Reserve Board to adopt and use it as a sort of special currency. The extension of government credit is effected on the basis of gold and the highest class commercial paper denominated as bank and trade acceptances. As gold is not present in sufficient quantity — dollar for dollar — to meet the tremendous sums of money required for the conduct of the nation's business, it becomes necessary, in order that the currency and credit of the country may be kept in a most liquid state, that some substitute measuring up to the qualities of gold itself, be used. The acceptance, as high class commercial paper possessing the qualities required by the Board, is, therefore, of great importance to the main- tenance of an ideal credit system. The acceptance modernizes the coun- try's credit structure, and it is for this purpose that bankers and business men should encourage their use in every way. LIQUIDITY OF THE NATION'S RESOURES MADE POSSIBLE BY THE EXTENSION OF THE ACCEPTANCE METHOD The desire on the part of commercial and financial interests of the country, as well as the government itself, is towards maintaining the resources of the nation in a most liquid state. The present system of open book accounts, in this respect, is unwise, since it ties up tremendous amounts of capital and renders it unproductive of wealth. Today, in the country's credit situation, there is a vast army of credit awaiting to be mobilized for the purpose of upbuilding our resources, but so long as we keep it in the form of book accounts, it is being unnecessarily chained, fettered and useless, from being utilized to the greatest extent. The releasing of the tremendous sums of money which otherwise lie dormant and unproductive would do more towards mobilizing the national 172 Commercial Banking and Credits 173 resources than any other means of credit extension. In other words, the general adoption of the acceptance and its appHcation to the credit system of the country would increase the business capital of the nation. ADVANTAGES TO THE BUYER, SELLER AND BANKER, EQUALLY ADVANTAGEOUS TO THE NATIONAL INTEREST It is equally true that the advantages which flow from the wider use of the acceptance in this country, benefiting alike the buyer, the seller, the banker and the consumer, are equally advantageous to the nation's welfare. THE ACCEPTANCE AS A FACTOR IN NATIONAL PREPAREDNESS At the present time, with the continuous call for efficiency methods, and the general adoption of those plans through which the aims of the government for utilizing the entire national resources to the fullest extent may be made possible, the more systematic operation of credit and its extension should be equally the aim of the entire business world. The national interest demands that the maximum of efficiency be introduced. Public interest is best subserved by better and more conservative business methods, by the elimination of wasteful methods of conducting business, and by improved trade relations and harmony among the commercial and financial world. WELFARE OF NATION LINKED WITH ITS CREDIT SYSTEM Credit is the life blood of business. The welfare of the nation demands that the credit system should at all times be at the height of efficiency. The development of sounder credit methods is not only important and urgent, but indispensable. Therefore, any methods having as their goal the bettering of business methods should receive the whole-hearted co- operation of the banker, the business man and the nation. THE ACCEPTANCE IN THE FIELD OF COMMERCIAL CREDIT The acceptance method is of great importance to the national interest. To the soundness of the nation's financial system, it is necessary that com- mercial credit be kept in such a condition of fluidity and usability that to the fullest possible extent it will serve as an unshakeable foundation for all times. BANK ACCEPTANCES Their History, Practical Uses, Operation under the Federal Reserve Act, Advantages, Eligibility, Discounts, Markets, Discount Corporations, Dollar Credits, Investments, etc., etc. CHAPTER XVII Bank Acceptances There has previously been discussed the nature and functions of credit, particularly as they relate to commercial credit and its instru- ments. There have also been considered the various classes of credit such as are availed of by individuals, firms, business enterprises, and Governments. However, by the banks there is created what is known as banking credit, which arises in a way similar to that of commercial credit. BANKING CREDIT Banking credit is the power of a bank to secure advances of funds in exchange for its promises to pay. In this respect, it is related very closely to commercial credit, the only difference being that in the former case, the bank is the source of credit instead of a business establishment. Banks in this respect are manufactories of credit. The credit of a bank is extended by means of the bank check, the bank note, the bank draft, and the newer means, — the bank acceptance. THE BANK CHECK A check is a written order on a bank to pay a stipulated sum of money, and is drawn by one who has a deposit there. It is usually made payable to the order of a particular party and must be indorsed by that party before it can be negotiated further or cashed. A bearer check is payable to anyone who holds it. Legally, the check is an implied promise on the part of the drawer that there are sufficient funds in the bank to meet it. The operation of bank checks is so common that no explanation need be given. They are of great utility in modern commerce, inas- much as they effect settlements between distant points and eliminate the inconvenience attendant upon the handling of actual money in the form of bank notes and specie. 177 178 Bank and Trade Acceptances THE BANK NOTE A second way in which a bank extends its credit is by the issuance of bank notes. Though under the Federal Reserve System, banks are discouraged to issue their own notes to circulate at par, this func- tion has not, however, been withdrawn entirely, but has been transfer- red from the banks that previously issued them into the privileges exercised by the Federal Reserve Banks, which today do most of the bank note issuing. The bank, may however, upon the discount of proper security with the Federal Reserve Bank, receive the proceed in Federal Reserve notes. THE BANK DRAFT The bank draft is another form by means of which bank credit is extended. It is an order by one bank on another bank, the same as a bank check is an order by a commercial firm on a bank. Practically all banks keep funds on deposit with banks in other cities, especially in the large financial centers, in order that they might be able to meet the demands of their customers for a form of payment which will be accepted without question. Banks draw against these accounts by selling their drafts to their customers, charging as a consideration for the service a small sum in the form of "exchange." Bank drafts pass as practically cash everywhere in the country, and are an important means by which settlements are effected by commercial as well as financial concerns. Drafts on New York are denominated "New York exchange" and are accepted all over the country at par, owing to the fact that New York is the commercial and financial center of the country and that businessmen everywhere have dealings with New York. THE BANK ACCEPTANCE Among the many radical changes in the mechanism of national and international finance which the war has brought about, few", if any, have been as important as the creation of the American bank ac- ceptance, the recognition of the trade acceptance, and the establish- ment of the American discount market. In this connection, before taking up the treatise on bank acceptances, their uses and advantages, it might be of interest to briefly review the historical aspect of this new form of credit and to learn the ex- Commercial Banking and Credits 179 periences gained by other nations while the use of the acceptance was in the process of evolution in this country. HISTORICAL ASPECT OF THE BANK ACCEPTANCE The acceptance may be said to be the simple and logical product of generations of trade and banking experience. The greatest advance in the acceptance method has been made by the leading European countries, which long ago proved to themselves that the acceptance is capable of meeting all the requirements of commerce and trade. Along these lines, therefore, have the systems of banking in Europe been worked out. The acceptance established a system under which com- mercial credit assumed a position of pre-eminence as a controlling at- traction for liquid capital, — a position in the money market to which that form of credit was rightly entitled. ENGLAND THE FIRST COUNTRY TO DEVELOP SOUND BANKING SYSTEM To England, however, must fall the honor of being the first to realize the great advantages in the employment of the acceptance as the basis of its credit system, since they were the peoples to lend their credit to others through the medium of this form of paper. As a re- sult, that country today foreshadows all the others in having developed a sound financial system on the basis of a sound credit system. THE LONDON MERCHANT BANKERS The merchant bankers of London were originally import merchants of exceptionally high standing, who paid for their imports by "ac- cepting" long time drafts drawn upon themselves by shippers in foreign countries. After these drafts had been accepted by them, they were discounted with Deposit Banks or Private Bankers at rates which had a distinct relation to the standing of the acceptors. In this way, the acceptance was created. Merchants of a moderate standing then endeavored to follow the procedure of the larger houses but were unsuccessful in the early stages, which made the financing of their importations a hardship. They either could not borrow against their own acceptances at all, or, if they could, the rates charged for interest and commission to i8o Bank and Trade Acceptances insure the risk were so high that the final cost of the imported wares left too small a profit to compensate them for their labor. These merchants discovered that by borrowing the signature of one of the leading merchants, they could finance their imports more ad- vantageously. They found that in this manner they could acquire advantages far more valuable to them than the small commission paid for the service rendered by such leading merchants. At the same time, the leading merchants realized the opportunities for profit to themselves in lending their signature by way of accepting drafts for other merchants. This encouraged them to continue the process on a larger scale. On account of the knowledge which they were able to acquire, by reason of their extended facilities and experience, on con- ditions of trade, as well as their knowledge of various kinds of mer- chandise which were to be imported and which were pledged as se- curity, of values, seasonal demands and markets, the leading mer- chants were indeed qualified to grant such credits, that is, to lend their signatures for a consideration. ACCEPTANCE BUSINESS FIRMLY ESTABLISHED In the course of time these merchants turned more and more to the business of lending their credit in the form of acceptances, not only at home, but to foreign merchants, banks and corporations. In connec- tion with this work and on account of their intimate knowledge of certain overseas countries, they became pioneers in extending loans abroad, and thus exerted a vast influence on the extension of English foreign trade. FRANCE AND GERMANY Turning now to the economic history of France and Germany, these two countries were likewise developing credit systems of their own. The foreign trade of both France and Germany increased step by step, and the ever increasing demand for acceptance credits, whereby to finance overseas trade, called for the development of the same facilities extended by the English merchant bankers for the benefit of English trade and commerce. FIRST EFFORTS TO ESTABLISH ACCEPTANCE BUSINESS UNSUCCESSFUL Both France and Germany had at that time, in the economic his- tories, been patrons of the banking system of England. However, the Commercial Banking and Credits i8i time had come when an effort had to be made by both to break away from London and establish their own acceptance market for the crea- tion and absorption of credit paper. But their efforts in the first instance were far from successful, and the franc and mark were found to be poor competitors alongside of the English pound sterling. The reason for this was due to the fact that London was the only free gold market in the world, and it was a well known fact and a practice in national and international commerce, that a bill on London meant gold and nothing but gold, if demanded. Another reason was the superiority of the London discount market, which, guided by a far sighted discount policy on the part of the Bank of England, was always able and willing to absorb any bills offered in the market. Of great importance to the further development of the English system of discount and rediscount, was the final recognition of this undeniable preference of the pound sterling, as a result of which a number of the most powerful continental banks established branches in London, bringing along with them large sums of money and additional facilities for the granting of sterling acceptance credits, particularly, of course, for the benefit of the customers of their home country. THE BANK ACCEPTANCE TODAY IS USED IN MOST IMPORTANT COUNTRIES OF EUROPE From the early periods of the development of English banking until the present day, a review of the system of credit in England shows remarkable growth. There, a broad discount market capable of absorbing all the commercial paper produced by the nation's busi- ness is at all times in existence. The countries of France and Germany were able, in time, to es- tablish the franc and the mark in the international commerce carried on by the merchants of their respective countries, and, while their development has not yet reached the importance of the pound sterling nor has their acceptance business reached that of England in volume, still, the benefits from the introduction and development of a system of discounts in the respective countries, have brought home to their merchants a decided advantage in the conduct of their trade. Some of the factors that have been found particularly effective in establishing acceptance markets in foreign countries have been large exports, with which to offset imports; direct steamship connection i82 Bank and Trade Acceptances with all important overseas ports ; the establishment of a charter mar- ket; the upbuilding of insurance companies to underwrite marine and other risks ; extension of loans to foreign governments, thus encourag- ing and creating valuable trade relations ; extended and direct means of communication with foreign governments ; and lastly, the strengthen- ing of the financial structure at home and the establishment of a stable and elastic discount market. THE BANK ACCEPTANCE IN AMERICA In the same manner in which both France and Germany patronized the acceptance facilities of England, so, under similar circumstances, until the establishment of the Federal Reserve System in 1914, was America one of Europe's best customers in the use of its acceptance facilities. The common practice of financing American foreign trade was upon the basis of the pound sterling, and later, occasionally through Paris and Berlin. The annual tribute paid to Europe for this service was not only an unnecessary burden, but also reflected upon the dignity of a nation of the political and economic importance of the United States of America. CREATION OF BANK ACCEPTANCES MADE POSSIBLE BY ADOPTION OF FEDERAL RESERVE SYSTEM In short, the introduction of the Federal Reserve Act finally gave to national banks the power to "accept." The development of the ac- ceptance in the United States was further made possible by the fact that the war had seriously affected the ability of foreign institutions to continue their acceptance business along normal lines, America, as a result of the great war had become the world's workshop, and its export trade increased to unparalleled figures. Aside from its trade with Europe, new markets were developed throughout the world, calling for greater banking facilities. BEGINNINGS OF THE AMERICAN BANK ACCEPTANCE During the first year of the war, certain such drafts as were drawn upon American banks in dollars, when offered in the foreign markets, were looked upon by the foreign bankers with doubtful eyes and were not so favorably accepted from the start as were acceptances drawn in pounds sterling. Commercial Banking and Credits 183 Slowly but surely, the banks and bankers all over the world began to realize that America had set its new financial machinery in motion; that a discount market was rapidly being established, and that bank bills drawn on New York could readily be discounted and at advan- tageous rates. As a consequence, foreign bankers began to quote closer rates for such bills, especially since, simultaneously with these offerings of American bank acceptances, a strong demand for remit- tances on New York and other American centers sprang up. Previous to the introduction of the bank acceptance in the United States, the usual custom employed by merchants in this country to finance their overseas trade was by the drawing of bills on London, Paris or Berlin for the purpose of effecting a settlement of their debts, leaving the risk of exchange to themselves. The amount paid by American business establishments to foreign banks and bankers alone mounted into the millions of dollars. With the new conditions that arose, due to the circumstances resulting from the war, the acceptance came into use and was shown great favoritism by the leading banks and bankers of the country. Foreign countries also became ready buyers of American bank acceptances wherewith to create New York funds, selling such funds in turn to their customers who had debts to meet in the United States. In this way, a means was created for the ebb and flow of credit transfers between the United States and foreign countries, with the result that at present the American dollar is quoted at all the principal exchange markets of the world. CHAPTER XVIII Bank Acceptances Definition of bank acceptance. — A banker's acceptance is defined by the Federal Reserve Board as "a bill of exchange of which the ac- ceptor is a bank or trust company, or a firm, person, company, or cor- poration engaged in the business of granting banker's acceptance credits." Trade and bank acceptances distinguished. — The trade acceptance arises from a transaction between the buyer and the seller. The bank acceptance is the result of the granting of credit by a bank or banker. The trade acceptance is accepted by the buyer. The bank acceptance is accepted by the bank as the agent of the buyer. Bank acceptances, how created. — In the same manner in which the individual or the firm can command credit, so is the bank capable of extending its credit to its customers, where, for a consideration, it permits its customers to use its credit, which may be either secured or unsecured, depending upon the business character and the financial responsibiHty of the applicant. Bank acceptances herein referred to arise out of commercial transactions. Distinction between a bank's acceptance and a bank's note. — When a member bank of the Federal Reserve System accepts a draft or bill of exchange drawn against it, it enters into a contract substantially similar to that of the maker of a note, so that, while the form of the instrument differs, the legal effect is the same. The use of a bank's acceptance, however, differs from the use of its promissory note. When a bank accepts a draft or bill of exchange for one of its custom- ers, it merely lends its credit responsibility to that customer in order that he may procure the funds elsewhere. The holder of a bank's acceptance has the same legal rights against the bank as the holder of its promissory note. Credit standing of bank acceptances based upon bank's credit. — The degree to which the credit value of bankers' acceptances is meas- 184 Commercial Banking and Credits 185 ured is by the standing and credit of the accepting bank. The financial standing of banks is generally better known than that of individuals, firms, corporations or others, eliminating to a great extent the neces- sity and inconvenience of investigating the standing of the drawer or the indorsers. The holder of a bank acceptance knows that the ac- cepting bank is entirely responsible. The holder knows also that if the credit of the bank is good, he need have no fear of poor security, as the bank is primarily liable. Acceptances by member banks of the Federal Reserve System. — Under the provisions of the Federal Reserve Act, member banks are permitted to accept drafts which have not more than six months to run, exclusive of days of grace, arising out of one of the following ways : — 1. They must have originated from a transaction involving the im- portation or exportation of goods. 2. They must have arisen from a transaction involving the domestic shipment of goods, and must have had shipping documents at- tached at the time of acceptance securing or conveying title to the goods. 3. They must have been secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title to readily marketable staples. Member banks may accept bills of the classes above designated up to fifty percentum of their capital and surplus. Where permission is obtained from the Federal Reserve Board, such member banks may accept paper of the class above mentioned up to one hundred per- centum of their capital and surplus. Acceptances arising from do- mestic transactions may not exceed fifty percentum of the capital and surplus of the bank. The bank is prohibited also from accepting for any one person, firm, company or corporation, drafts aggregating more than ten percentum of the capital and surplus of the member bank. But, where drafts above referred to, carry with them the docu- ments or other security, the latter limitation does not apply. Bills drawn to furnish dollar exchange. — The fourth class of bank- ers* acceptances comprises bills drawn on member banks by banks and bankers in foreign countries, for the purpose of furnishing dollar ex- i86 Bank and Trade Acceptances change. These may be accepted by the former to an amount not in excess of fifty percentum of their capital and surplus, provided the maturity of such drafts is not more than three months, exclusive of days of grace. Applications for privilege of accepting required to be filed with Federal Reserve Bank. — Any member bank with an unimpaired capital equaling at least twenty percentum of its paid-up capital, desiring to accept up to one hundred percentum of its paid-up and unimpaired capital stock and surplus, as above described, is required to file an ap- plication with the Federal Reserve Board, through the Federal Reserve Bank of its district. The Federal Reserve Bank then reports the financial status of the applying bank to the Board and states whether the general financial conditions in the district are such as to make the granting of the application advisable, whereupon, the application is approved or rejected. The Federal Reserve Board has also provided that any applications which are approved may be rescinded by giving ninety days' notice to the member bank. Limitations as to amount which any one member bank may accept.— The fifty percentum limitation on drafts accepted for the purpose of furnishing dollar exchange is not to be included in the limits placed by the Act upon acceptances of a member bank of drafts and bills of exchange drawn against the shipment of goods or against warehouse receipts covering readily marketable staples. Purchase by member bank of its own acceptances. — Member banks which purchase their own acceptances before maturity are not required to include them in the aggregate of acceptances authorized by the Federal Reserve Act. It has been necessary in the past for banks, in order that the acceptance market might be developed, to buy many of their own acceptances. While it is undesirable in the opinion of the Federal Reserve Board for a bank to buy its own acceptances, it is essential that the credit of the accepting bank be protected through such purchases where the market conditions prevent absorption. The purchase by a bank of its own acceptances is equivalent to a loan or advance to the customer for whom the acceptance is made, and the liability of the customer is subject to the limitations placed on loans. The power of a member bank to accept drafts is entirely distinct from the power to discount acceptances of others. Commercial Banking and Credits 187 Eligibility of bankers' acceptances for rediscount with the Federal Reserve Banks. — The term "eligibility" applied to bank acceptances signifies what may be purchased or discounted by a Federal Reserve Bank. In order that it may be eligible, it must conform to all the requirements of the Federal Reserve Board. Rediscount by Federal Reserve Banks of Acceptances. — Federal Re- serve Banks may rediscount for any of their member banks, notes, drafts or bills of exchange, provided they have the following requisites : — 1. They must have a maturity at the time of discount or not more than ninety days, exclusive of days of grace. 2. Drafts drawn for agricultural purposes must have a maturity of not more than six months, exclusive of days of grace. Agricultural paper includes notes, drafts, bills of exchange or trade acceptances, drawn or issued for agricultural purposes, or based on the sale of live stock, and the proceeds of which have been used or may subsequently be used for agricultural purposes, including the breeding, raising, fattening, or marketing of live stock. 3. They must have arisen out of actual commercial transactions, namely, they must be instruments drawn for agricultural, industrial or commercial purposes, or the proceeds of which are to be used for such purposes. 4. They must not have been issued to carry on trading in stocks, bonds or other investment securities, except bonds and notes of the United States. 5. The aggregate of negotiable paper bearing the signature or in- dorsement of any one borrower, whether a person, firm, company, or corporation, rediscountable for any one member bank, must not exceed at any time ten percentum of the unimpaired capital and surplus of such bank. This restriction, however, does not apply to the discount of bills of exchange drawn in good faith against actually existing values. General character of eligible instruments. — The Federal Reserve Board has determined that instruments themselves to be eligible for rediscount at a Federal Reserve Bank must meet the following re- quirements : — 1. They must be instruments, the proceeds of which have been used, or are to be used, in producing, purchasing, carrying, or marketing goods in one or more of the steps of the process of production. i88 Bank and Trade Acceptances 2. They must not have been used nor contemplated being used for permanent or fixed investments of any kind, such as lands, buildings or machinery. 3. Their proceeds must not have been used nor contemplated being used for investments of a purely speculative character. 4. They must be secured by the pledge of goods or collateral, if they are otherwise eligible. Applications for rediscount required from member banks by Federal Reserve Bank. — Member banks are required to make application for rediscount to the Federal Reserve Bank, which will satisfy itself as to the eligibility of the instrument. Member banks must furnish with all applications for the rediscount of notes, drafts or bills of exchange, a certificate, in form prescribed by the Federal Reserve Bank, that to the best of their knowledge and belief, the instruments have not been issued for prohibitive purposes. (For commercial banking practice under the Federal Reserve and acceptances, see Part III.) The discount of bankers' acceptances. — By the provisions of the Federal Reserve Act, Federal Reserve Banks may discount for mem- ber banks bankers' acceptances having a maturity at the time of dis- count of not more than three months' sight, exclusive of days of grace, which are indorsed by at least one member bank and which grow out of transactions involving the importation or exportation of goods, or which grow out of transactions involving the domestic shipment of goods where shipping documents are attached at the time of ac- ceptance, or which are secured at the time of acceptance by a ware- house receipt or other such document conveying or securing title, covering readily marketable staples. Federal Reserve Banks may likewise acquire drafts or bills of exchange drawn on member banks by banks or bankers in foreign countries, or dependencies, or insular possessions of the United States for the purpose of furnishing dollar exchange. Eligibility of bankers' acceptances. — In order to be eligible for rediscount, bankers' acceptances must have been drawn under a credit open for the purpose of collecting or settling accounts, resulting from transactions involving, (1) the shipment of goods between the United States and a foreign country, or between the United States and any of Commercial Banking and Credits 189 its dependencies or insular possessions, or between foreign countries, or (2), the domestic shipment of goods where shipping documents are attached at the time of acceptance, or (3), they must be secured at the time of acceptance by warehouse receipts or other such documents conveying or securing title covering readily marketable staples, or (4), Federal Reserve Banks may acquire bills drawn to furnish dollar ex- change which have been accepted by a member bank in accordance with the regulations relating to acceptances by member banks, and these bills must be acquired prior to the acceptance where indorsed by a member bank. Evidence of eligibility of bankers' acceptances. — Federal Reserve Banks must be satisfied from the acceptance itself or otherwise, that it is eligible for rediscount, which evidence of eligibility may consist of a stamp or certificate affixed by the acceptor in a form satisfactory to the Federal Reserve Bank, but no evidence is required where a bill is accepted by a national bank. CHAPTER XIX Procedure of Financing Imports Through Dollar Credits Dollar Acceptances drawn on National Banks against imports are gen- erally drawn against what is known as a Commercial Letter of Credit. A commercial credit is an undertaking on the part of the bank to loan its credit (not its funds) to a customer. The customer, who is the original recipient of this extension of the bank's credit, utilizes it by making it available in favor of the foreign shipper. He, therefore, requests the bank to notify the shipper that the latter may draw on the bank, up to a certain amount and within a certain time, provided certain specified shipping documents are attached to the draft. For example : A and Co. of New York have bought from B and Co. in Buenos Aires, forty-eight bales of wool at thirty cents a pound, cost and freight New York ; marine and war risk to be covered by A and Co. in New York, at their own expense. As this contract is subject to the opening of a ninety days' sight bank credit, A and Co. file with their New York bank the proper application for a commercial credit. (This applica- tion is to the following effect.) APPLICATION FOR COMMERCIAL LETTER OF CREDIT The Bank Foreign Department New York City 19 Gentlemen : Buenos Aires Please open a confirmed documentary credit by mail on (name of city) Ourselves about $16,000.00 for account of not to exceed the sum of (purchaser) B and Company, Buenos Aires Full in favor of available by drafts for (shipper) 90 days invoice value drawn at sight covering ship- ( specify time) 48 bales of wool at 30 cents per lb. ments) of — Cost and freight, New York New Yorls to (destination) against delivery of the following documents : 190 Commercial Banking and Credits 191 Invoice, Consular Invoice, Bills of Lading to the order of The Bank Marine War risk | insurance is to be covered by ourselves in N. T. (shipper or purchaser) Credit to be available until 19- ( state expiration of time) Special Instructions; Bills of Lading Must Show Freight Prepaid Yours truly B and Company The bank, having passed favorably on the application, thereupon issues its "Letter of Credit" in favor of B and Co. (Form of Letter of Credit follows.) FORM OF LETTER OF CREDIT LETTER OF CREDIT NO New York February i6th 1920 Messrs. B. & Company Buenos Aires Argentina Gentlemen : We hereby authorize you to value on us at ninety days' sight for account of Messrs. A. & Company, New York, for any sums not exceeding in the aggregate amount of U. S. $16,000. Sixteen Thousand Dollars U. S. Currency, against shipment of eight bales of Wool at 30c per pound cost and freight New York. Full set of bills of lading for such shipment made out to the order of the Bank, together with invoice and consular invoice, must accompany draft. Marine and war risk insurance are covered in New York. Bills of lading must show freight paid. All drafts drawn against this credit to be drawn and negotiated on or after (date) and to contain the clause "Drawn under your letter of credit No " The amount so drawn is to be endorsed on this letter of credit. We hereby agree that such drafts as you may draw by virtue of this credit, and, in accordance with the above bills, shall be accepted on presen- tation and paid at maturity. Yours respectfully, Bank 192 Bank and Trade Acceptances A and Co., upon receiving the instrument, forward it by mail to B and Co. in Buenos Aires, or, if necessary, have its contents communicated to the beneficiaries through the bank by cable. In order to protect the Bank, A and Co. sign an agreement as follows : New York, 19 To the Bank of the City of New York Gentlemen : Letter of Credit having been issued at (my or our) request of which a true copy is on the other side, (I or we) hereby agree to its terms, and in consideration thereof (I or we) agree with you to provide in New York, one day previous to the maturity of the bills drawn in virtue thereof, sufficient funds in cash, to meet the payment of the same with per cent commission, and (I or we) undertake to insure or have insured at (my or our) expense, for your benefit, against risk of Fire, Sea and War, all property purchased or shipped pursuant to said Letter of Credit, in Companies satisfactory to you. (I or we) agree that the title to all property which shall be purchased or shipped under the said Credit, the bills of lading thereof, the policies of insurance thereon and the whole of the proceeds thereof, shall be and remain in you until the payment of the bills referred to and of all sums that may be due or that may become due on said bills or otherwise, and until the payment of any and all other indebtedness and liability now ex- isting or now or hereafter created or incurred by (me or us) to you on any and all other transactions now or hereafter had wuth you, with author- ity to take possession of the same and to dispose thereof at your discretion for your reimbursement as aforesaid, at public or private sale, without demand or notice, and to charge all expenses, including commission for sale and guarantee. Should the market value of said merchandise in New York, either be- fore or after its arrival, fall so that the net proceeds thereof (all expenses, freight, duties, etc., being deducted) would be insufficient to cover your advances thereagainst with commission and interest, (I or we) further agree to give you on demand any further security you may require, and in default thereof you shall be entitled to sell said merchandise forthwith, or to sell "to arrive," irrespective of the maturity of the acceptances un- der this Credit, (I or we) being held responsible to you for any deficit, which (I or we) bind and oblige (myself or ourselves) to pay you in cash on demand. In case (I or we) should hereafter desire to have this Credit confirmed, altered or extended by cable (which will be at (my or our) expense and risk), (I or we) hereby agree to hold you harmless and free from re- sponsibility for such confirmation, alteration or extension and from er- rors in cabling, whether on the part of yourselves or your Agents, here or elsewhere, or on the part of the cable companies. Commercial Banking and Credits 193 This obligation is to continue in force, and to be applicable to all transac- tions, notwithstanding any change in the composition of the firm or firms, parties to this contract or in the user of this credit, whether such change shall arise from the accession of one or more new partners, or from the death or secession of any partner or partners. It is understood and agreed that if the documents representing the property for which the said Credit has been issued are surrendered under a trust receipt, collateral security satisfactory to the Bank of the City of New York, such as stocks, bonds, warehouse receipts or other security, shall be given to the Bank of the City of New York, to be held until the terms of the Credit have been fully satisfied and subject in every respect to the conditions of this agree- ment. It is further understood and agreed in the event of any suspension, or failure, or assignment for the benefit of creditors on (my or our) part, or of the non-payment at maturity of any acceptance made by (me or us), or of the nonfulfillment of any obligation under said Credit or under any other Credit issued by the Bank of the City of New York on (my or our) account, or of any indebtedness or liability on (my or our) part to you, all obligations, acceptances, indebtedness and liabilities whatsoever shall thereupon, at your option then or thereafter exercised, without notice, mature and become due and payable. It is understood and agreed that you shall not be held responsible for the correctness or validity of the documents representing shipment or ship- ments, nor for the description, quantities, quality or value of the mer- chandise declared therein. B and Co. in Buenos Aires, upon receiving the credit, and having as- certained that the terms of the credit agree with the terms of sale, place the shipment aboard steamer, prepaying the freight according to contract, and taking out the bill of lading in the name of the New York bank, ac- cording to the terms of the credit. B and Co. then draw up their draft for the invoice amount. (For form of a draft used for similar purpose, see Part IV.) To this draft arc attached the invoice, consular invoice and full set of bills of lading. B and Co. take these to their banker in Buenos Aires, producing at the same time the Letter of Credit of the New York bank. The Buenos Aires banker thereupon buys the draft with the documents attached, at the current rate for bank drafts at ninety days sight on New York, paying B and Co. the equivalent in Argentine currency. B and Co. get a high price for their dollar draft, because : I. The discount for the ninety days, which the draft has to run after it is accepted, is figured according to the New York discount market. 194 Bank and Trade Acceptances which on the average is likely to be considerably below that of any other money center. 2. No bill stamp is charged in New York, as is the case in London or the continent. B and Co., the shippers, having knowledge of these advantages, are therefore able to quote to A and Co. a lower selling price for the mer- chandise than would have been possible had A and Co. offered a pound sterling or other credit. In other words, the American importer is enabled to derive the full benefit growing out of the use of the dollar credit. The Buenos Aires banker in the meantime has forwarded the draft and documents to his New York correspondents, who, upon arrival, present them to the drawee bank for acceptance. The latter, upon verify- ing the draft and documents with the terms of the credit, "accepts" the draft by affixing its stamp and signature and returns the same to the party that presented it, retaining, however, the shipping documents. (For form of accepted banker's draft used for similar purpose, see Part IV.) The presenting bank either holds the draft until maturity or discounts it in the open market, in accordance with the instructions of the South American banker. In the meantime, the steamer carrying the wool has arrived, and A and Co. request delivery of the shipping documents in order to enable them to make custom house entry and take possession of the goods. It will be readily understood that by giving up the shipping docu- ments the New York bank is giving up its only collateral. The bank's interest must be protected, and the documents are therefore surrendered against cash, under rebate for the unexpired time the draft has to run, or against approved security ; or, if the client is of good financial and moral standing and has the confidence of the bank, against what is called a "Trust Receipt." (See Form of "Trust Receipt," Part IV.) According to the Trust Receipt the customer is obligated to hold the goods in trust for the bank, and, when sold, to turn the proceeds over to the bank immediately upon collection of the money, which is to be used in liquidation of the amount of the acceptance. As we have seen from the "Agreement," the money to meet the acceptance must be paid to the accepting bank at the latest one day before the maturity of the draft. By that time (after ninety days) the goods have usually been disposed of, and these acceptances are therefore essentially self-liquidating. THE FINANCING OF IMPORTS THROUGH DOLLAR ACCEPTANCES The dollar acceptance has established itself formally in the estimation of the American importer and exporter, and has taken a leading position Commercial Banking and Credits 195 in the world's credit markets. Formerly, the American merchant was required to pay to the London banker a handsome commission for the latter's services in the financing of his foreign trade transactions. Not only was this operation costly in the respective commissions, but it also entailed a good deal of lost time on the part of the American merchant, for if he desired a sterling credit, he found it necessary to establish one in most cases through the medium of an American bank. This entailed a good deal of lost motion as well. Besides, the commission which he was required to pay for this service to compensate the American as well as the English bank on which the credit was drawn, must have been sufficient for both. In other words, the importer by availing himself of sterling credits, was required to pay two commissions. The dollar credit eliminates, for the benefit of the importer, the wastage of time and of money, for he deals with only one bank and is required to pay but one commission, and besides, the time required to consummate the financial arrangement is far less than is the case under sterling credits. ELIMINATION OF RISK IN EXCHANGE Under the system of foreign credits, the American importer assumes the risk at all times incident to the fluctuation of exchanges. Assume that the importer has made arrangements for the establishment of a credit available to his correspondent at a distant point, and that sometime later, the obligation becomes due and payable at the bank. Suppose the rate of exchange has in the meantime risen to a considerable figure over and above the rate prevailing at the time the credit was arranged for. The importer is therefore required to carry this risk at all times, the result of which in many cases deprives him not only of his profits but of his in- vestment in the transaction as well. In the case of an acceptance in for- eign money, the risk of exchange is an all important factor in view of the extreme fluctuations to which the exchanges are sometimes subject. In availing himself of the dollar acceptance method, the American importer knows exactly what his goods cost him and there is no ambiguity as to how much money he owes his bank at the time the acceptance falls due. He can then operate with assurances of success. BENEFIT OF THE MONEY RATES QUOTED IN THE NEW YORK MARKET As a result of the war and the development of the bank acceptance in this country, a discount market for this class of paper has been created with ever increasing demands for the same as an item of investment and 196 Bank and Trade Acceptances as an equalizer of the cash and investment positions of banks. Due to these facts, the money rates quoted in the New York market are on the average Hkely to be lower than those of other money centers. This also is an important fartor to the importer in this country for he then may have the use of the money at an economical expense. ADVANTAGES OF DIRECT SERVICE The American importer in this connection is able to spare himself from the contingencies frequently arising in connection with foreign shipments, such as short weights, losses, damages, etc.. If it should happen that they occur, they may be adjusted more properly, cheaply and effectively be- tween the American banker and the foreign shipper or his bank, than if such adjustments had to be made via the London banker as would be necessary in using a sterling credit. At the present time this convenience is of exceptional importance to the American importer as the abnormal fluctuation in prices for all kinds of merchandise makes or unmakes a deal, according to the promptness with which the bank is able to support the transaction on behalf of the importing merchant. This is an advantage of dealing directly and in which the elimination of a second intermediary party cuts out time and trouble otherwise incurred. ECONOMIC VALUE TO THE NATION ARISING FROM THE USE OF DOLLAR CREDITS Quite apart from the direct economy to the individual resulting from the use of the dollar credit is the broader question of the economic value accruing to the nation as a whole through the designation of the dollar as the basis of value in our credit transactions with the rest of the world. The volume of our imports during the past decade has increased rapidly. Before 1900, the total of our imports amounted to less than one billion dollars. The volume today has risen to from three to four billion dollars. Included in the imports are products from all parts of the world shipped direct to our own shores, and while no nation enjoys higher international credit than the United States, yet it is a fact, that in order to finance the movement of our imports, we have been compelled to have recourse to indirect channels and call on foreign money centers to furnish us with the necessary credit facilities to take care of a large part of our imports. For this accommodation, the American merchant has had to pay millions of dollars annually, in interest, commissions and other charges. Today, Commercial Banking and Credits 197 with the general adoption of the dollar credit and its more extended use, these charges can be saved and an economy effected to the benefit of our commerce as a whole. At no time in the economic history of the United States has the pur- chasing power of the dollar in foreign markets been greater than it is today because of the varying premium which the dollar commands at present, practically throughout the world. The time is present to increase the prestige of the dollar and to standardize its use in the liquidation of our direct purchases abroad. To this end, the co-operation of the mer- chants of the country and of the bankers to extend the use of dollar credits is, therefore, necessary. CHAPTER XX Procedure of Financing Exports Through Dollar Acceptances The procedure of financing exports through the medium of Dollar Acceptances differs somewhat from that of financing imports. Assume that a foreign buyer has bought goods in the United States. The American exporter who has sold the goods, demands a bank credit against which he can draw when shipment has been effected. The buyer abroad accordingly arranges with his local bank for the credit, and the foreign bank, in turn, requests its New York bank correspondent to open a credit in favor of the American shipper, available by the latter's ninety days' sight drafts on the New York bank, such drafts to be accompanied by certain shipping documents which are specified. The American shipper, after having effected shipment and secured the bill of lading and other documents required, draws his draft and presents the latter to the New York bank for acceptance, together with the required shipping papers. The New York bank "accepts" the draft, to fall due in ninety days, and returns the accepted draft to the shipper, forwarding the shipping documents by first mail to the foreign bank. The foreign bank turns these documents over to its client, the buyer of the goods, against such security as it may see fit. Funds to meet the acceptance on the due date are guaranteed and furnished by the foreign bank to the New York bank. In the mean time, the American shipper, who now holds a "Bank Ac- ceptance," in payment of his shipment, either discounts that acceptance with his own bank, or sells it in the open market at what is called "the ruling rate for member bank acceptances," thus receiving his money. The advantages of the Dollar Acceptance in this case are obvious. The foreign buyer wants ninety days' time at the lowest cost ; this the Ameri- can seller gives him. Knowing that he can sell the acceptance which he receives from the New York bank at the lowest possible rate, the seller adds only a small percentage to his selling price to cover this dis- count. The American seller is thus enabled to quote lower prices now 198 Commercial Banking and Credits 199 than at any time before the passage of the Federal Reserve Act, when he was compelled to draw on some foreign bank, which procedure com- pelled him to add to his price a good margin to protect himself against loss in the exchange, a higher discount, and the cost of the bill stamps. It may be said here that the American exporter who demands a bank credit to cover his sale, is still too insistent upon receiving a "sight" credit, under which he receives "cash against documents." If we are to remove a positive restriction from our export trade, it is imperative that our ex- porters consent to the drawing of "long" drafts on American banks which open credits, if so requested by the foreign buyers. The latter want time in which to make a "turnover," and this can easily be granted by the American sellers at low cost and little or no risk. The excuse of some business houses that they do not care to be contingently liable as drawers of these acceptances is irrelevant, since such contingent liability is un- important in view of the fact that the acceptors of these drafts are strong banks which have become still stronger on account of membership in the Federal Reserve System. Not all exports are covered by "Bank Credits," — in fact, the majority are not. Notwithstanding, Bank Acceptances have been successfully em- ployed in the financing of our export trade, particularly exports to South and Central America, the banks paying with their credit by giving their "acceptance" instead of paying with funds when purchasing documentary drafts on those countries. Bank Acceptances may be employed in anticipation of actual exports. For instance, a merchant has a large order for an export shipment. He may, after having made proper arrangements with his bank, draw long term drafts on the latter, and use the funds thus created for the purchase or preparation of the shipment. After the shipment has been made, the draft on the foreign purchaser or the foreign purchaser's bank, together with the relative shipping documents, may be handed in to the bank for discount or collection, the bank in turn using the proceeds of this draft in liquidation of the original acceptance. This method has been successfully used since the outbreak of the war, and due credit should be given to the Federal Reserve Board for its in- telligent and practical interpretation of the law. DOLLAR ACCEPTANCES a "Against domestic shipment of goods, providing shipping documents conveying or securing title are attached at the time of acceptance." :^o6 Bank and Trade Acceptances b "Secured at the time of acceptance by zvarehouse receipt or othef such document conveying or securing title covering readily mar- ketable staples." In order to finance his purchases and take advantage of the cash dis- count, the merchant formerly went to his bank and borrowed on his own promissory note such funds as he required. The rate of interest which he had to pay varied according to the state of the money market, while the money market in turn always showed the effect of our old banking sys- tem, with its lack of rediscount facilities and its consequent tendency to sudden and abnormal fluctuations. Today, the merchant who wants to borrow is privileged to pursue a different course. Let us take the case of a buyer who has to meet a draft for $50,000, covered by domestic shipping documents. The buyer, having made the proper arrangements with his bank, au- thorizes the latter to "accept" the seller's draft for $50,000 drawn upon the bank — {not upon the buyer), provided the draft is accompanied by certain specified documents, such as invoices, railroad bills of lading, etc. There are instances when it is more practicable that the customer himself draw upon the bank instead of the seller. However, the other method is the more usual one. The draft is presented by the seller, accepted by the bank and returned to the seller. The documents are withheld by the bank and turned over to the customer against the familiar trust receipt. The seller now has the "Bank Acceptance" for $50,000 which he can readily discount in the open market. Thus, actual funds are provided under competition by the banking and investing community at large. The procedure of creating Dollar Acceptances secured by warehouse receipts or other documents covering readily marketable staples does not vary materially from that outlined above, except that the customer of the bank usually does not designate any third party to draw the draft on the bank, but draws it himself. The advantages of these acceptances are f our- fold: First : The seller receives his money promptly. Second: The bank's customer has obtained his loan (or rather credit) at a lower cost than by the use of his promissory note, the rate for a three months' promissory note, all other things being equal, being higher than the discount rate for a three months' Bank Acceptance Commercial Banking and Credits 201 plus acceptance commission. This difference is eloquently illus- trated by the different valuation applied by European bankers to an investment of ready negotiability — as compared with one that locks up the funds of the bank. Third: The bank is able to accommodate its customer more readily, since it advances only its credit, the ultimate buyer of the Acceptance advancing the actual money. Fourth : It has a balancing effect on the money market. Thus, through the use of the Bank Acceptance the bank can take care of the needs of its customers without carrying their paper in its portfolio. In other words, the bank, in granting accommodations, is not dependent upon the amount of loanable funds it has available. CHAPTER XXI ACCEPTANCE CORPORATIONS Their Importance to the Development of a Discount Market What is regarded as most important to the development of an open discount market for the country is the so-called "acceptance corpora- tion." Prior to the passage of the Federal Reserve Act, the banking institutions of this country operated under the National Bank Act or under the various State laws. These several laws imposed limitations upon the activities of State or Federal chartered banks. For example, a national bank was prohibited from having any liabilities in excess of its unimpaired capital paid in, other than to its stockholders for its capital stock, to its depositors for its deposits, or to persons who might hold its notes of issue, or drafts or bills drawn against money on deposit to the credit of the national bank or due to it. State laws imposed similar restrictions upon State institutions. The acceptance of time drafts drawn upon banks and payable in the United States was hardly possible, and, as a result, letters of credit to finance the importation or exportation of merchandise were not issued by American banks. Foreign banking business was financed princi- pally by the larger American banking institutions which maintained correspondents in the principal cities abroad. Through these means, banks in the United States were able to issue credits in terms of for- eign currency. Prior to the passage of the Federal Reserve Act, most of the inter- national business and finance was carried on through London, and sterling exchange was almost the exclusive medium used by the Amer- ican banker and merchant in the financing of their foreign trade. Introduction of the American Bankers' Acceptance The Federal Reserve Act passed in 1914, gave the power to member banks of the system to accept drafts drawn upon them up to fifty per cent, of their capital and surplus, provided they were drawn in con- formity with certain specified restrictions and limitations. A few of 202 Commercial Banking and Credits 203 the larger banks throughout the country readily took advantage of this opportunity and began issuing dollar credits on account of the advantages and economies which the dollar credit offered in com- parison with credits issued in foreign currencies. The importer and exporter in this country readily favored this means of financing their foreign trade through the dollar credit, as it afforded them a cheaper rate of commission, and economies in time and expense by dealing direct and only with the American bank. In the issuance of foreign credits, a merchant was not sure of the cost of his goods until he had transacted for the purchase of enough exchange to cover the draft for each particular transaction, and further- more was compelled to make payment at least ten days or more before maturity of the foreign draft in order to enable his bank to have funds in the hands of its foreign correspondent at the date of maturity. Another way in which he could place funds in the hands of the bank in the country where the credit was issued was by means of "cabling" the sum at his own expense, say two days or so before maturity. By using the dollar credit, the American merchant is always as- sured of the prices of his goods as there is no question of fluctuating exchanges, for the merchant pays only in dollars. The dollar credit also saves the importer interest, and he pays the issuing bank the day before maturity of the draft. During the war, on account of high interest rates in European cen- ters, bank acceptances became more favorable and the value of dollar credits issued rapidly increased. Dealings in bank acceptances pro- gressed to such a point that the few banks who were issuing them soon found that the demands of their customers could not be met under the restrictions imposed by the Federal Reserve Board. An amend- ment was, therefore, passed to the Act permitting member banks under certain conditions prescribed by the Federal Reserve Board, to accept up to one hundred per cent, of their capital and surplus instead of fifty par cent., which was the original limit. Even these increased facilities, favoring the acceptance powers of the member banks were soon found to be inadequate and the demand for American dollar credits soon exceeded the supply. The Board at Washington quickly realized that if the banks of this country were going to finance the importation and exportation of merchandise to and from the United States, some substantial enlargement of their facilities would have to be granted. 204 Bank and Trade Acceptances The Rise of Acceptance Corporations In 1916, an amendment was passed to the Federal Reserve Act, allowing member banks to invest up to ten per cent, of their capital and surplus in corporations organized to do a foreign or international banking business, and a number of such corporations have been organ- ized as a result of this amendment. They specialize in the issuance of dollar credits and in the acceptance of drafts drawn upon them. The Federal Reserve Board has imposed various restrictions upon the operations of these discount corporations, which may be enumer- ated as follows : 1. They are not permitted to receive domestic deposits, though they may receive deposits which are incidental to the carrying out of transactions in foreign countries or dependencies of the United States. 2. Against such deposits, a reserve must be obtained, which cor- responds to that required of member banks located in central reserve cities. 3. They may accept drafts and bills of exchange for all trans- actions permissible to member banks under provisions of the Fed- eral Reserve Act, but are obliged to make no acceptance for ac- count of any one drawer at any time in amounts in excess of ten per cent, of their subscribed capital and surplus, unless: (a) The transaction is fully secured, or, (b) Arises from the exportation or importation of mer- chandise, and (c) Is guaranteed by a bank or banker of undoubted solvency. 4. Whenever the aggregate of acceptances of any one corpora- tion outstanding at any time exceeds the amount of its capital and surplus, fifty per cent, of all acceptances in excess of such amount shall be fully secured. 5. Whenever the aggregate of such acceptances exceeds twice the amount of the subscribed capital and surplus, all acceptances outstanding in excess of such amount shall be fully secured, which- ever of said two requirements shall call for the smaller amount of secured acceptances. 6. The aggregate of all acceptances outstanding plus the total of all deposits held by any corporation must not exceed six times the amount of that corporation's capital and surplus, except with the approval of the Federal Reserve Board. 7. Discount corporations are required to maintain a reserve of at least fifteen per cent, in liquid assets as security for all out- standing acceptances, which reserve shall consist of cash bal- Commercial Banking and Credits 205 ances with other banks, bankers' acceptances, or such secur- ities as the Board may from time to time permit. 8. These corporations are required to make two reports an- nually to the Federal Reserve Board, covering such details of their operations as may be prescribed and as subject to such ex- aminations as the Board may order. Regarding "6" above given, the Federal Reserve Board has already in some cases given permission to acceptance corporations to create ac- ceptances to the extent of twelve times their capital and surplus. The ratio of liabilities on account of deposits and acceptances, therefore, is twelve to one, a figure which is quite on a parity with some of the largest and strongest banks in this country. Out of an increased de- mand for dollar acceptances and dollar credits and out of the inability of the existing banks to supply the demand, the acceptance corporation came into being. Creation of New Acceptance Corporations Since the amendment to the Federal Reserve Act permitting na- tional banks to hold stock in such corporations, a very rapid develop- ment in the formation of acceptance corporations has been the result. A number of these corporations have been organized and are to-day conducting business in the various large financial centers of the country. Their principal functions are the development and exten- sion of foreign trade and the establishment of branches in foreign countries. The policy of the Federal Reserve Board in this connection, has therefore been a very wise one, as it places at the disposal of the Amer- ican importer and exporter, through these acceptance corporations, a means of securing dollar credits with numerous advantages which they afford over other credits controlled by other exchange markets. The acceptances of these corportions sell in the open market at varying rates of from one-sixteenth to three-sixteenths per cent, higher than the acceptance of prime member banks. The discount corporations that have been organized and the various banks that have been instrumental in the development of the bank acceptance and dollar credits in this country have realized the neces- sity of creating a discount market similar to those of the European nations. Under present conditions, the ultimate market for most of the bankers' acceptances is the Federal Reserve Banks. During the 2o6 Bank and Trade Acceptances war, with the problems of Government financing on short term obli- gations at attractive rates, and the system of call money lending to which banks and the investing classes still adhere, there has not been afforded a maximum of assistance to the development of an open dis- count market. Conditions of this nature, however, cannot be expected to continue, for the time will surely come when Government obliga- tions will be cancelled to a large degree. These will have to be filled by some other form of high grade investment — not only from the standpoint of the individual but of the business man, and particularly, the bank. Effect of Call Loan System to Acceptance Growth The most serious cause retarding the development of an open dis- count market for the country is as heretofore mentioned the call loan system. Most of the larger banks, because of the higher yield from this class of loan, are tempted to continue to carry their reserves in this way, instead of in prime commercial paper of the class of bankers* and trade acceptances. The country banks, too, find it more profitable to transmit their funds to the larger cities to be loaned out at call money rates. Since call money rates have on the average been high, banks have clung to this form of investment. The development of a wide discount market in bank and trade acceptances will not only supply a means of investment to the banks of the country for their resources, but will tend to put buyer and seller of funds together, because of the investment advantages, and so make demands meet supply. No better basis for a discount market could be selected than the acceptance, representing as it does, paper of the highest class, and carrying evidence upon its face of a commercial transaction which gave it birth. But to this plan, the cooperation of the banker, the business man, and the investor is necessary. Realizing their advantages, encourage- ment in the use of acceptances should always be forthcoming by the commercial and financial interests of the country. The New Edge Act for Foreign Financing Of very great importance to the clarification and strengthening of the position of these acceptance corporations, it is hoped will be the Commercial Banking and Credits 207 so-called Edge Act, passed December 24, 1919, the principles of which, together with the text of the law, are given in Part V of the present work. On the whole, it is the opinion that these acceptance corpora- tions will grow to be among the most powerful institutions which the country has and will materially assist in strengthening our position in international as well as domestic finance and trade. CHAPTER XXII THE DEVELOPMENT OF AN OPEN DISCOUNT MARKET The Importance of Acceptances and High Grade Commercial Paper TO the Maintenance of a System, Which More Than Anything Else, Furnishes a Basis for Establishing the National Ideal of a Liquid Currency The introduction of the Fereral Reserve System prepared the way for the re-introduction of the trade acceptance and for the creation of the bank acceptance in this country, and established an open discount market for high grade commercial paper. The expression "open market" was one with which comparatively few bankers in the country were familiar at the time of the passage of the Act. They were acquainted with existing methods as previously used and were satisfied with them. They did not desire any central authority to regulate their operations, as they believed the Federal Reserve Board would do. The Act, the passage of which was the result of a time-worn call for banking reform, had as its ultimate purpose the establishization of a sound financial credit system. This, the Board sought to bring about through the standardization of commercial paper, according to the nature of their origin, and by the selection of the best classes of such paper, to create a continuous market for them. The purpose of the present chapter is to outline the essential features of an open discount market and the advantages of such a market to the commercial, financial and public interests of the country. FUNCTIONS OF THE DISCOUNT MARKET The Open Discount Market Importance of a Discount Market to Efficient Banking System The mobility of reserves is a necessary complement of a good bank- ing system. The European countries have found from experience that 208 Commercial Banking and Credits 209 the efficiency of their banking systems is dependent mainly upon the maintenance of a wide and highly developed discount market. They realized still further the importance of such a discount market in that it could act as a regulator of the banks, as well as the countries' cash and investment position, and maintain a state of liquidity of their assets. THE DISCOUNT MARKET AS A RESERVOIR OF THE COUN- TRY'S FUNDS A discount market, for the reason that it gathers together the funds of the investing classes of the country, viz., of the commercial, invest- ing and savings' banks, private bankers, trust funds, corporation funds, funds of insurance companies, paper brokerage and discount houses, and investors of all classes, is capable of being a reservoir for the available reserves of the country. Above all, the banker and business man wants to be assured that he can get money, other things being equal, when he wants it. If he knows that there is money to be ob- tained with ease by utilizing his commercial paper holdings, he will be encouraged to invest his funds in standardized commercial paper. PERFORMS FUNCTIONS OF BUYER AND SELLER A discount market performs the functions of both buyer and seller. It brings together the party who has money and the party who seeks it, and provides a means whereby funds which are needed may be obtained, as well as gives employment to such funds. A discount market should be wide enough to afford these facilities to the buyer and seller at all times. DISCOUNT MARKET MAKES MOBILITY POSSIBLE We have seen also that by the introduction of the Federal Reserve System, the reserves of the country were made capable of transfer from one part to another according to the needs of the localities. Suppose one Federal Reserve Bank finds itself in need of money at short notice. It would then discount the commercial paper held by it of another Federal Reserve bank, taking the proceeds by transfer, thus causing a flow of money from a place where it is abundant to a place where it is needed. The same is true as between bank and Fed- 210 Bank and Trade Acceptances cral Reserve bank, the latter rediscoimting the commercial paper holdings of the former. EQUALIZING INTEREST AND DISCOUNT RATES WITHIN THE COUNTRY By the simple process of discounting as above described, supposing one locality should have a surplus of funds. In that event, money there would invariably loan out at a low rate. On the other hand, let us take a district where the demand for money exceeds the supply. Interest rates there would necessarily be higher. The total money supply would always tend towards maintaining equilibrium, that is, the greater supply of money would flow towards the lesser supply of money, and thus rates of interest in these two districts under consider- ation would thereby be equalized. This is accomplished by the dis- counting of bills, acceptances and other commercial paper, either be- tween member banks and the Federal Reserve Bank or between the Federal Reserve banks themselves. Undoubtedly, it cannot be asr sumed that at all times it is possible to maintain a market equalized in every respect, but the variance in the rates between two markets can be kept so close to one another that its diilerence will not be felt so very much. THE DISCOUNT MARKET AS AN EQUALIZER OF DIS- COUNT RATES BETWEEN THE UNITED STATES AND FOREIGN COUNTRIES A discount market operates as an equalizer of discount rates between the United States and foreign countries in the same manner as it acts as an equalizer of rates between different sections of this country. In the London discount market, because of the facilities provided and the opportunities afforded foreign banks for the investment of their re- sources, they have collected there in large numbers and have brought with them considerable funds which are loaned out in commercial paper transactions and so support the discount market. It is believed by bankers, economists and authorities on banking and finance that the result in the United States would be similar, and that the use of acceptances would more than anything else contribute to the develop- ment of a broad discount market. Commercial Banking and Credits 211 Interest rates in two countries are seldom the same at any one time, and bankers and investors seek employment for their funds according to the higher rate of interest which is afforded in the relative markets. The existence of a broad discount market in the United States would encourage foreign banks and investors to purchase our bills and acceptances as an investment when rates are higher in this country than abroad. This would tend to move our interest rates in sympathy with the level of interest rates in foreign countries. Should the rates decline in this country, the banks and investors here would enter for- eign markets for the purchase of their bills, and foreign banks and investors would also reduce their holdings of American bills, because of the lower rates of interest. A movement would thus set in to equal- ize rates and keep them as nearly on a par with each other as is possible. THE DISCOUNT MARKET AS A STABILIZER OF INTEREST RATE LEVELS WITHIN THE COUNTRY It is a proven fact that interest rates in the United States fluctuate on a much wider scale than in European countries. Interest rates in Europe in normal times are much more steadier than in the United States, moving, except in rare cases, by only one-sixteenth of one per cent, and on the whole within narrower limits. In the United States, however, rates fluctuate from one-fourth of one per cent, to one per cent, at each instance. A broad discount market would connect the money centers and the credit centers of abroad with this country, and by the movement of money from one center to the other, according to the movement of rates, it would tend to lessen fluctuation and would eliminate erratic movements of interest and exchange rates which are always the feature of isolated markets. THE DISCOUNT MARKET AS A STABILIZER OF GOLD MOVEMENTS BETWEEN COUNTRIES Gold movements between this country and other foreign countries have always been a factor of considerable importance to the American merchant, for the transfer of gold has greatly influenced the rates of exchange on foreign points. 212 Bank and Trade Acceptances The effect of exchang-e rates between two countries, the currency of one of which is of lesser value when measured in the terms of the currency of the other, is to cause banks to increase their holdings of the bills of the country the rates of which are lower. As an illustra- tion, upon the decline in value of the dollar, foreign banks would in- crease their holdings of American bills on account of the cheap dollar exchange rate, while American banks would sell their holdings of foreign bills on account of the high exchange rates on foreign coun- tries. This would tend to ward off gold movements for a time. The leading banks of Europe have followed this process of accum- ulating a line of foreign bills at low rates and disposing of them when conditions are reversed. It has been carried on successfully with ad- vantageous profits accruing to the foreign banks. Not many banks engage in the business of exporting or importing gold, this being con- fined principally to a small number of private banks or firms doing a banking business. The exportation or importation of gold is carried on by these banks for the purpose of yielding a profit, however small. A discount market would tend to eliminate these wasteful and tempo- rary shifts of gold, unnecessary in the majority of cases, as settlement by commercial paper would be more resorted to. WHAT IS NECESSARY TO THE MAINTENANCE OF A DIS- COUNT MARKET Before the passage of the Federal Reserve Act, there was no such thing that we could very well call a discount market existing in this country. The European countries which had developed extensive and effective banking systems of the highest order, all possessed wide markets affording facilities for the discount of credit instrument. It was observed by these European countries that a standardized instru- ment of credit would be necessary, and it is for this reason that there was developed a so-called two name and three name paper as the best and safest way in which credit might be extended and circulated. The Federal Reserve Board realized the handicap of unstandardized paper to the creation of a discount market, and readily chose the acceptance as a high form of credit instrument upon which the exist- ence of such market could be based ; and by making a distinction as to trade and bank acceptances with their attendant advantag-es, has sub- stantially eliminated to a large degree the responsibilities and dangers Commercial Banking and Credits 213 involved in the open book account method and that of written instru- ment of various sorts as evidences of debt. A prime banker's acceptance is a credit instrument of the highest sort and is preferred by the Reserve banks for purchase and invest- ment. A large amount of their reserves is invested in this class of paper. A trade acceptance, moreover, arising out of transactions involving the sale of goods, is from its very nature a more certain form of credit than a mere promissory note or a draft, which may have been drawn for a number of purposes. The Reserve banks have given their full support to the acceptance, knowing well from experience both in this country and abroad, that this method of transacting and financing business is by far superior to the open account method or to single name paper dealings. It is due to these two instruments of credit, the trade acceptance and the bank acceptance, that the foreign discount markets depend, and it is upon these two instruments of credit that the American discount market will eventually be supported. ESSENTIAL FEATURES OF A BROAD DISCOUNT MARKET The factors necessary to the maintenance of a broad discount market may be analyzed as follows : 1. Those creating the acceptances, or the accepting banks in the case of bankers acceptances, and the seller and buyer of goods in the case of trade acceptances. 2. Those purchasing and selling acceptances, generally the banks. 3. The central bank of rediscount ; in the United States, the Fed- eral Reserve banks ; in England, the Bank of England ; in France, the Bank of France, etc. 4. Discount corporations, brokers and others of a similar nature, which though considered as middlemen, are highly essential to the maintenance of a broad discount market. In England, where the acceptance is most highly developed, the discount market acts according to supply and demand. .Should the supply of bills thrown out in the market be greater than the demand for the same by the investing classes, the tendency would be to in- crease the rate of discount, thus putting an automatic stop to the use of acceptances and commercial paper, and thereby checking credit over-extension. 214 Bank and Trade Acceptances The liabilities arising on account of acceptances by the accepting banks abroad average generally from fifty to seventy-five per cent, of their capital and surplus. The acceptance banks, though not extend- ing money but their credit, are limited in their operations. In this country, it is believed that with the development of the acceptance, the bankers here will be enabled to operate in the same manner as the accepting banks of Europe. The liability that an ac- cepting bank assumes is very much the same as that arising out of a "deposit," and though banks do not, by accepting, obligate themselves to give a present right to demand money, still the acceptance implies a future payment, and it is well to consider to what extent the banks could use or extend their credit if they should operate as extensively as the acceptance houses and banks abroad. To this may be said that so long as the proportion of a bank's capital and surplus to its total liabilities is of a fair ratio, it could safely pledge its credit to advan- tage. But the requirements of its customers for that form of accom- modation must also be considered, and thirdly, the credit standing of the bank, and lastly, the attitude of the market for acceptances at the time. The second class having a direct bearing on the discount market are the banks and other purchasers and sellers of acceptances, which constitute the active discount market. It is by the sale and purchase of drafts that the discount market is really maintained, and this is in accordance with the individual cash and investment position of the banks and investing classes. For this reason a discount market should afiford wide facilities for acquiring ready cash in exchange for paper in the form of investments and vice versa. Banks would do well in purchasing acceptances to spread their ma- turities so that they could continually have such acceptances maturing in quantity, thus affording both a cash and an investment advantage. In order that a properly balanced and liquid condition of its assets may be maintained, a bank must have on hand at all times a certain amount of cash. This includes the legal reserve such bank carries with the Federal Reserve Bank and its cash in vault, which constitute the bank's primary reserve. Acceptances as a Secondary Reserve In addition to its cash, a bank's resources should be in the form of some liquid readily saleable investments as a secondary reserve, and Commercial Banking and Credits 215 it is here that the acceptance can best play its part. Of course, the position of a bank as regards its holdings of acceptances depends upon the nature of its business. Some institutions are engaged more along specific lines, as distinguished from general commercial banking, for instance, making loans on mortgages of real estate, carrying invest- ments in the form of public credit, in which may be included govern- ment and municipal bonds, and investing in building securities. But as a ready means of obtaining cash, next to its actual available means in the form of its legal reserves and cash in vault, the acceptance, being self liquidating at short intervals, and of high credit standing, is un- doubtedly the best form of secondary reserve investment. Invest- ments in acceptances and similar high grade commercial paper are advisable in the case of banks having large volumes of deposit liabil- ities and where a condition of uncertainty of drawings on the part of their depositors exists. The acceptance may properly be considered as the next best reserve to actual cash, superseding the banks' investments in loans and dis- counts, and further down the line, in point of liquidity, in securities, and finally in fixed investments in buildings, etc. The advantages of the bank acceptance as a form of liquid security have been recognized by a large number of States, which have passed laws permitting savings banks organized under their laws to invest in such bankers' acceptances. The fact that these savings institutions are investors has created a continuous demand for such paper, thereby furthering the growth of the acceptance. The acceptance as a form of investment for savings banks is most advantageous, in that stocks or bonds in either railroads, industrial, mercantile or commercial enter- prises, do not always maintain their book prices. Savings banks are therefore compelled to dispose of their holdings with great losses. A proportion of their resources invested in acceptances will enable them to meet initial runs with confidence and ease, and with no fear of depreciation in value. The third component of the discount market is the central redis- counting bank, which in this country is the Federal Reserve Bank. It cannot be expected nor assumed that a discount market would al- ways produce an equal number of buyers and sellers. In cases where the situation becomes one that is not equalized by purchases between banks, the central rediscounting bank should operate as the stabilizer by the purchase or sale of sufficient quantities of paper to keep con- 2i6 Bank and Trade Acceptances ditions normal. Frequently, the sales on the part of banks and dealers in acceptances more than exceed the purchases, and at such times the Federal Reserve Bank should purchase under such regulations as it deems wise, either direct in the open rmarket, or from member banks a certain amount of bills, and vice versa. The fourth factor in the maintenance of a discount market is the discount corporation and broker. These are middlemen. They act on behalf of the buyer and the seller at one time. The broker and dis- count corporation are always in touch with the market and know at all times the requirements of one bank as well as the objects of an- other to either buy or sell. The brokers not only operate as middlemen but at times they also purchase for their own account large quantities of commercial accep- tances, which they let out at intervals to the investing classes, banks, and others, thus constituting a floating supply without which a free open market would be impossible. On the whole, the broker and the discount corporation give to the discount market its effectiveness and importance, and may be considered as the white corpuscles of the acceptance market. THE AMERICAN DISCOUNT MARKET AND ITS DEVELOP- MENT The acceptance business in the United States had its actual begin- ning shortly after the outbreak of the European War. Owing to changed conditions which the great war brought with it, a few large banks in this country immediately took advantage of existing oppor- tunities and began issuing dollar letters of credit payable in the United States. However, no market for acceptances existed at that time, which greatly hindered the development of an American accep- tance market. The very companies which issued dollar letters of credit had to purchase them themselves at the start, but gradually, with a knowledge of their advantages, other banks took a hand in this bidding and purchasing, which action on their part resulted in lower discount rates. Increasing bids tended to lower still further such rates until the ruling level was from three to three and one-half per cent. Later bankers and brokers began to take a more active part in their purchase, freely bidding for the acceptance, and it was then that a discount market had arisen. When the market indicated that it could absorb Commercial Banking and Credits 217 more of these acceptances, discount rates fell still further, as low as two per cent. It was then that the acceptance had the push of the business and banking element of the country, as well as the support of the associations in every circle of trade, industry and occupation throughout the United States. Banks and business men, thereafter, began to take up this new method of financing. With the great favor shown to this class of paper by the leading bankers and business inter- ests of the country, the Federal Reserve Board finally put its stamp of fitness on their use, thereby firmly establishing the American Dis- count Market. THE DISCOUNT MARKET AS IT EXISTS TO-DAY Though still in its infancy, but making great progress, the accep- tance has yet to overcome great difficulties. An important factor to be considered restricting its use is found in legislative restrictions which retard many of our banks from fully utilizing their acceptance powers. The very nature of the acceptance, that it must not be used to finance permanent investments not pure speculations, nor for the purpose of furnishing working capital, or so-called accommodations, enables a proper distribution of credit risks. By all means, the accep- tance should be restricted from being used for speculative enterprises. It is the unfamiliarity of the majority of banks, particularly the small ones scattered throughout the country, with the trade and bank acceptance and their practical usefulness, that is the real cause re- tarding their development. American methods of doing business under the open account and single name paper method, stand ten to one against the acceptance to-day, and must be overcome before the latter may be firmly established in this country. For this reason, it is necessary that acceptances, when used, should be used for the specific purposes out of which they are created, that is, in liquidation of cur- rent and existing transactions only. Moreover, during the war, the development and use of the accep- tance was confronted with great difficulties, arising out of govern- mental finance. Even to-day, the trade and bank acceptance is gov- erned by the prices and interest yields of governmental securities. Whether they be in the form of liberty bonds or in treasury certifi- cates, the government securities yield a standard of interest below which acceptances cannot go far without becoming unattractive for 2l8 Bank and Trade Acceptances investing banks. It is hoped that in the near future, when the govern- ment regains its credit standing which it enjoyed before the war, and, when the value of government securities will undoubtedly be en- hanced, the acceptance will be looked to more and more by all invest- ing classes as ideal for the employment of funds. CHAPTER XXIII Acceptances as Investments Acceptance a new form of short term investment. — Heretofore we have confined our expressions on the trade and bank acceptance in connection with their usefulness, importance and application to com- mercial banking, but we have not touched upon the acceptance as a means of investment. With the development of the acceptance method in the United States and with the rapid development of the Federal Reserve System, there has been made available to the investors of this country a new form of short term investment. Used extensively in Europe. — The acceptance is not a new instru- ment of credit, having been in use in the leading European nations for a great number of years. So extensive is their use in those coun- tries that they circulate there as freely as do checks in the United States, and are used in the majority of commercial transactions, re- quiring credit. However well developed a system of banking based upon the acceptance, these European nations have built up, this class of commercial paper is, however, a comparatively new development in the United States. Prior to the passage of the Federal Reserve Act, banks in this country were not allowed to accept drafts drawn on them and payable at some future date. This was due mainly to the lack of knowledge of the acceptance and its advantages both as an investment and as an instrument of credit. Importance of the Federal Reserve Act to acceptances. — The pro- visions and amendments of the Federal Reserve Act are of such importance to the development of commercial banking and accep- tances that it is thought best to outline such as are of direct appli- cation to the acceptance market. In this country, recognition of ac- ceptances as a sound and highly desirable investment is rapidly fol- lowing the broadening field of their commercial utility. Privileges afforded banks as to accepting and investing. — Under the Federal Reserve Act, banks are given the privilege of accepting up 219 220 Bank and Trade Acceptances to fifty per cent, of their capital and surplus, and in special cases, where applications are approved by the Board, such banks may receive the right to accept up to one hundred per cent, of their cap- ital and surplus. The Federal Reserve System includes all national banks, many State banks, and trust companies, having acceptance proviliges, both as to acceptances and as to purchases. The pres- ent day procedure involved in investing in acceptances outside of direct dealing between buyer and seller is along the following lines: The work of the commercial paper brokers. — Above all, it is neces- sary that intermediaries be established which should bring buyer and seller of commercial paper together. Thus, out of necessity, there have arisen numerous commercial paper brokers and dealers who are in close touch with commercial firms having paper to ofTer on the market. They are always in touch with banks and financial estab- lishments throughout the country having money to invest. The com- mercial paper broker or dealer will, therefore, take acceptances from off the hands of the holders and dispose and distribute them accord- ing to the needs of the investors. These investors may be either National banks or State banks, trust companies, discount corpora- tions, private investors, corporations, firms, and even in some States, savings banks and trust estates. Other methods of dealing in commercial paper. — Though the com- mercial paper broker is considered of great importance in the proper distribution of acceptances, where his services in bringing buyer and seller together help supply to meet demand, this is not the only way in which commercial paper dealings are carried on. Banks sometimes deal directly with other banks, and sometimes deal with firms having commercial paper, direct, without the intermediaries. However, the commercial paper broker, because he is familiar with market provi- sions of commercial paper and knows the sources of demand most favorable to the seller as well as to the buyer, should be utilized wherever and whenever possible. Acceptance a favorable item of investment. — The acceptance is fast becoming a favorable item of investment with the banks and investing classes. Not only is there an advantage to the banks and general finan- cial establishments in investments in acceptances, but also to the indi- vidual, firm and to the corporation which have at various times during Commercial Banking and Credits 221 the course of their business operations surplus funds which could be used for investments. Example of use. — As an illustration, assume that a corporation has declared a dividend on its capital stock to be payable two months hence. Let us further assume that it desires to meet this future con- tingency and that it has ample funds on hand for the purpose. In order to avoid unprofitableness in allowing such funds to remain on deposit till it is necessary that they be disbursed, an investment in high grade bank acceptances having a maturity approximating the due date of the dividends, would give to the corporation a means of employing its funds until required. The case of the business estab- lishment or individual is much the same, they being enabled also to loan out their surplus funds and to purchase prime commercial paper of the "acceptance" class, at better yields than otherwise for short term investments. Discount corporations. — Coincident with the development of the Federal Reserve System permitting member banks to accept up to a certain percentage of their capital and surplus, there has also been developed in this country, as a result of the demands upon the busi- ness and financial world, a number of so-called discount corporations, which make a specialty of "accepting" paper and which are regulated in their operations in much the same way as are member banks. These acceptances arising out of commercial transactions are very high-class investments for member banks, individuals and. in fact, are sought by the Federal Reserve Banks throughout the country, as investments. The Federal Reserve Banks and their investments in acceptances. — The growth of the investment business in acceptances by the Fed- eral Reserve Banks has risen to many hundreds of millions of dollars during the past year, which bears evidence to the fact that they are a very desirable method of employing surplus funds. Again, the rates established for the discount of bankers' acceptances, generally lower than those of call loans, still bear with them a greater advantage in the better security offered and the better means of liquidity, which should make them far more preferable as investments. Other factors in the acceptance investment business. — The progress in the development of the acceptance business as an item of invest- ment has brought into existence numerous commercial paper dealers 222 Bank and Trade Acceptances and brokers, who make a specialty of dealing in bank and trade accep- tances. These dealers, many of whom are private bankers and well known stockbrokers, generally issue periodical bulletins called "accep- tance offerings." The houses having commercial paper to offer natu- rally acquire them through purchase from commercial firms and gen- eral holders of bank and trade acceptances. An investor, firm, cor- poration, or bank, having surplus funds, chooses from the offering list the same as from a list of bonds and other securities, and selects ac- cording to the faith based upon the acceptors of the draft. The Acceptance as an Investment Analyzed Availibility of trade and bank acceptances. — ^Trade acceptances and bank acceptances at the present time are available for investment pur- poses in nearly any amount and for any desired maturity. Of the two, bankers' acceptances are the usual form available for investment. The bank acceptances comprise two classes, eligible and ineligible. Both forms of bankers' acceptances are dependent upon the rating and credit standing of the accepting banking institution, which places the bills accepted among the highest grade of securities. The chief responsibility rests with the accepting banks, which because of their greater credit ability and more conservative operation, obviates the necessity for close scrutiny of the drawer of the bill or its indorsers. The Acceptance as an Equalizer of the Bank's Cash and Invest- ment Position Liquidity of investments. — As a secondary reserve for banks, there is no other investment so liquid as the acceptance. Such a bill is a short term investment offering assurance of payment at maturity. The open market feature of such an acceptance and the purchasing power of the Federal Reserve Banks contribute to the position of the acceptance as a premiere investment for banks wishing to establish a secondary reserve. As a liquid investment, the acceptance is the highest form of com- mercial paper. Banking experience for many years has demonstrated that purely commercial loans are the safest of all temporary invest- ments. Commercial Banking and Credits 223 Acceptances as Short Time Investments The acceptance to-day is available in almost any amount and for almost any maturity. The various banks and discount corporations making a specialty of acceptances have at all times a large supply of this class of commercial paper available for investment purposes. One great advantage in the acceptance as an investment lies in the fact that its security is of a very high character and it is self-liquidat- ing. As a short term investment, it is much more desirable and con- venient than other means of investments. The Federal Reserve Banks employ a considerable amount of their funds in investments in accep- tances, and distribute them so that their maturities are continu- ous. At the present time more favorable legislation is being adopted in many States of the Union favoring the acceptance as a means of investment for savings banks and trust companies. More- over, a large number of corporations and business houses throughout the country, particularly those w^hich favor the acceptance method, purchase quantities of this class of commercial paper according to their surplus funds. Trade Acceptances The second class of acceptances, namely trade acceptances, are largely bought by Federal Reserve Banks and are dealt in extensively by the banks and discount houses of the country. The same discussions heretofore stated in connection with bank acceptances v^ould apply equally to trade acceptances. They, too, will undoubtedly prove to be a desirable form of investment, their qualities as standardized commercial paper of a high class being gen- erally recognized by the banks and investing houses. CHAPTER XXIV CONCLUSION The Need for Wholehearted Co-operation In the course of the development of the acceptance in this country, as in the development of other worthy purposes, difficult tasks invariably arise, not because of the question of merits involved, but for the reason that a complete understanding of the method to be introduced and ex- tended, is lacking. The acceptance idea, coming from a national demand which arose from war conditions, for the establishization oi a sounder credit system, has today the approval of the leading commercial, financial, and governmental bodies. It is pleasing also to find that on the whole only a comparatively slight opposition has been encountered in the development of the trade ac- ceptance method. TIME REQUIRED Different minds develop different points of view. The acceptance method, where it is desired to be introduced, must clearly have its ad- vantages shown and its merits made to be appreciated. The progress of the acceptance has been very rapid. From almost zero at the start, the acceptance today has risen to more than national prominence and im- portance. However, it is not in the least strange that the entire business of the country has not yet adopted the trade acceptance method. Experience has shown, as well as the economic histories of nations, that radical changes in the business methods of a country, even though of the very best, come slowly and require serious and continued effort. THE BANKER REVIEWED The banker has all to gain and nothing to lose by the trade acceptance method. The acceptance has proved itself to be the best commercial paper in the field. It is the safest of all other forms of commercial paper. It may be utilized for the investment of idle funds. It is in itself an ideal 224 Commercial Banking and Credits 225 liquid asset. It creates a keener sense of business obligation, a prompter payment of debts, better business in general, and as a consequence, better banking conditions. J THE SELLER To the seller of merchandise, we would say that the trade acceptance is yet the best plan of assistance that has ever been devised for him and a protector of his interests to the fullest extent. It carries with it a definite promise to pay, an acknowledgment of the correctness of deliveries and of the obligation itself, a shorter term of credit, liquidity of assets, better facilities for collection, closer touch with the buyer and the seller's bank, and practical relief from expenses and burdensome practices which have grown up under the open account method. THE BUYER For the buyer, the trade acceptance is of a particular and distinct benefit. It puts him in the classification of a preferred customer, one who serves notice on the business world of his disposition and ability to meet his obligations promptly at maturity. It gives to him greater independ- ence of action, provides an effective check against over-buying and over- borrowing, eliminates the evils of laxity in credit extension, in specula- tion, and tends to establish his standing with the banks and the business community. The buyer should not be fearful of any inroads upon his privileges. The trade acceptance does not take away from him his cash discount nor his privilege to use single name paper, for ihey both operate smoothly and without conflict in the same field. BUSINESS MEN MUST CO-OPERATE There are still today great numbers of American businessmen who are uninformed concerning the details of the trade acceptance method, and therefore, unconvinced as to its merit. Some at least have given the ac- ceptance a so-called introduction. In the majority of cases where this was done, the acceptance has come to stay. Nevertheless, others of an ultra- conservative type, while conceding its merit, arc not disposed to disturb existing business conditions, which in the past have proven themselves satisfactory for their purpose. There is still another class of American businessmen, whose attitude may be described as unduly cautious. They 226 Bank and Trade Acceptances want all others to settle down in the use of acceptances before they them- selves will adopt the plan. THE GOVERNMENT Nevertheless, the prospect is altogether encouraging, for in nearly every line of business is the acceptance used today. The Government has ren- dered the greatest assistance, through the mechanism of the Federal Re- serve System, to the progress of the acceptance method. This alone has influenced many to adopt the plan. Through the establishment of wider banking facilities, the Government has given every advantage to the standardization of commercial paper and has thereby rendered an in- valuable service and aid to the country. THE BANKER But other sources which are fully capable of rendering an equally valuable assistance to American business have been the banks, and here the question has been, "What are they doing?" Evidently, the only possi- ble answer for this question is that if they possess sufficient business in- telligence to be able to appreciate the merit of a superior article when it is presented to them for sale or discount, or of the general adoption of sounder credit methods, they, too, must have a greater interest in the plan. They must be progressive, alert to encourage every movement tending to bring about the soundest and most scientific credit system. If the banker has been accused of retarding the development of the acceptance, this situation, however, is fast becoming remedied and a greater interest is being shown daily by increasing numbers of banks throughout the country for more information on the acceptance and its principles. Even those banks which have displayed an unfavorable attitude in the past towards the acceptance method are today fast coming to realize its prac- tical utility. Already, there has been established the basis for an Ameri- can open discount market and the users of the acceptance are becoming more numerous every day. With the proper publicity to this better form of credit, by the banker, his help and co-operation towards extending its use, with the encouragement which he is able to give the business com- munity, the progress of the acceptance will be most rapid indeed. PART III COMMERCIAL BANKING PRACTICE AND ACCEPT- ANCES UNDER THE FEDERAL RESERVE SYSTEM Giving the Rulings, Regulations, Opinions of Counsel, General Statu- tory Provisions, and Amendments to 1920, in Connection vi^ith Commercial Banking Practice Under the Federal Reserve Sys- tem ; an Authoritative and Standard Reference Work Covering the Entire Field Relating to Acceptances in Commercial Banking Practice Under the Fed- eral Reserve Act and Amendments Thereto. COMMERCIAL BANKING AND CREDITS BANK AND TRADE ACCEPTANCES PART III COMMERCIAL BANKING AND CREDITS ACCEPTANCES General Introduction Commerce and finance owe much to the acceptance, used by other commercial and financial centres for hundreds of years with success, but only recently permitted by our banking laws. Acceptances are daily proving more and more of advantage, alike to the banker, the domestic merchant, the manufacturer, the importer, the exporter and the investor. It has served to remove obstacles that stood in the way of a free cultivation of foreign rharkets, and in this connection it must be realized that a broad discount market is essen- tial if we are successfully to compete for a share of the world's business. Under the authority granted by the Federal Reserve Act to the Federal Reserve Board, there has been made provision for the devel- opment of a broad discount market. Briefly, acceptances under the Federal Reserve Act and in commercial banking practice may be summarized as follows : Any national bank may have oustanding acceptances aggregating fifty per cent, of its capital and surplus. By applying to the Federal Reserve Board a bank may receive permission to have outstanding acceptances up to one hundred per cent, of its capital and sur- plus, but in no event may acceptances in domestic transactions exceed fifty per cent, of the capital and surplus of the bank. No acceptance may have a maturity later than six months after the date of acceptance. The amount any member bank may accept for any one person, firm, or corporation must not exceed ten per cent, of the bank's capital and surplus, but such limitation does not apply, how- 229 230 Bank and Trade Acceptances ever, where the bank is secured by some actual security growing out of the same transaction as the acceptance ; the security must remain with the bank all the time the acceptance is outstanding. With the authority of the Federal Reserve Board, a member bank may also accept up to fifty per cent, of its capital and surplus, drafts drawn upon it for the purpose of furnishing dollar exchange. When accepted for this purpose, drafts must mature within three months. Several States of the Union have already enacted legislation per- mitting the banks operating under their laws to make acceptances. Further than this, it has been made legal for savings banks and estate funds to invest in acceptances. The amount and restrictions, how- ever, vary with the different States. The four classes of bills which national banks may accept are : T. Those arising out of a transaction involving the importation or exportation of goods ; 2. Those arising out of a transaction involving the domestic ship- ment of goods ; 3. Those which are secured by readily marketable goods in storage. 4. Those drawn for the purpose of furnishing dollar exchange. ACCEPTANCES ARISING OUT OF A TRANSACTION INVOLV- ING THE IMPORTATION OR EXPORTATION OF GOODS Example of an importation acceptance ; Procedure ; — Let us assume that an importer is desirous of purchasing a quantity of manila hemp. He advises his bank regarding the particulars of the transaction, and his credit standing being satisfactory, his bank issues at his request a so-called commercial credit. By means of this credit, the Philippine exporter is authorized to draw on the bank up to a stipulated amount, which would be for the value of the hemp purchased by the importer. Furthermore, such provisions which require that drafts be drawn and negotiated on or before a certain date, and giving the usance, that is, that the drafts must mature thirty, sixty or ninety days, or whatever the period may be after sight, are included in the commercial credit. Besides stipulations as to the documents and certificates of insur- ance, bills of lading, etc., to the effect that they must be attached to the drafts, also appear in the commercial credit. There are two means through which such credit may be availed of Commercial Banking and Credits 231 by the exporter abroad ; first, the mere mailing of the credit to the importer, and secondly, the cabling of the information through a bank located in the vicinity of the exporter. Upon receipt of this advice, the exporter prepares his shipment, and when so shipped, that is, boarded upon the steamer, he is in possession of the ocean bill of lading and other necessary documents, and is then enabled to draw a draft on the bank in this country issumg the credit for the value of the hemp. Let us further assume that the draft has a maturity of ninety days, and all documents required by the commercial credit in question are attached to such draft. He then takes the draft to his local bank, which purchases the draft at the current rate of exchange for ninety days' sight dollar bills. In the above case, the shipping and other documents are all made out or endorsed so as to give the bank purchasing the draft title to the goods. The local bank in Manila forwards the draft and docu- ments to its agency or correspondent in this country. The draft is then presented by the correspondent of the Philippine bank to the bank in this country issuing the credit, and if, after an examination of the draft and documents attached, everything is found to be in order, the bank accepts the draft, returning it to the party presenting it, who, in this case, is the correspondent of the Philippine bank. The accept- ing bank likewise retains all other documents necessary to be sur- rendered to the importer. The importer, upon giving the accepting bank a trust receipt in exchange for the documents, is then enabled to get his manila hemp. The importer thus has ninety days in which to secure the manila hemp, and dispose of it or manufacture and sell it before he is required to place his bank in funds to meet the maturing draft. The representative of the Philippine bank sells the acceptance in the open market at the prevailing rate for ninety day bills. For making this transaction possible, the importer's bank charges him a small commission for accepting the draft. Only credits issued by the well-known banks, of course, will be acceptable to the exporter as he requires a bill which will command the best rate. This accept- ance business is therefore usually handled by banks in the larger cen- ters. The lesser known institution usually has credits required by its importers issued by one of its larger correspondents, under the guaranty of the smaller bank. 232 Bank and Trade Acceptances Example of an Exportation Acceptance; Procedure; — An exporter in this country, let us assume, has been asked to ship a quantity of machinery to a firm in Great Britain. The exporter is not willing to ship the machinery on condition that he draw a draft direct on his customer, nor is he willing to sell such customer on open account. In such case, a banker's acceptance credit may be availed of. The foreign importer goes to his bank in Great Britain and has a credit arranged with its correspondent in this country to cover the value of the machinery. The British bank, let us assume, considers the credit of the importer as favorable and accordingly requests its correspondent in this country to issue the credit. The British bank, moreover, guar- antees that the bank issuing the credit in this country will be placed in funds before such drafts as may be drawn upon it under the credit issued, mature. The exporter is then advised by the bank in the United States that, as requested by the purchaser, it will accept his drafts drawn upon it up to a certain amount, when the drafts are accompanied by documents as specified in the letter of credit. The procedure in documents in an exportation acceptance is, on the whole, similar to that involved in importations, and the documents must, of course, represent the machinery which has been shipped. As soon as the exporter secures his necessary shipping and other documents, he draws a draft on the bank here issuing the credit, hav- ing a maturity in accordance with its terms, for the value of the machinery. The exporter then presents the draft and documents to the bank issuing the credit, and everything being found in order, the bank accepts the draft and returns it to the exporter, who sells it in the market and thus receives payment for his machinery. Such docu- ments are then forwarded to the British bank, to be released by it to the purchaser, either upon trust receipt or otherwise. The British bank, through remittances, or by charge against its balance in this country, places its correspondent in funds to meet the draft at maturity. ACCEPTANCES ARISING OUT OF TRANSACTIONS INVOLV- ING THE DOMESTIC SHIPMENT OF GOODS Procedure in the case of domestic transactions is very much similar to those involving the exportation or importation of goods. As an example, let us take the case of a manufacturer who desires Commercial Banking and Credits 233 to finance his purchases of raw material by means of bankers' accept- ances. He accordingly requests his bank to issue a credit in favor of the sellers of the goods. Such credit is for a stipulated amount not exceeding to any large extent the value of the goods. Such drafts drawrn to finance purchases of raw materials usually have a usance which give the purchaser time to manufacture this raw material and sell the manufactured product. They are usually drawn for a period of ninety days, as bills with a longer maturity may be said not to have a ready market. The seller will then ship his goods and draw a draft for their value on the bank issuing the credit. The draft, together with shipping documents, is then forwarded to the bank, and, as in the case of exports and imports, such documents must be so issued or indorsed as to give the bank title to the goods. The bank accepts the draft and returns it to the shipper, who disposes of it at the prevailing discount rate. The documents are turned over to the manufacturer, probably under a trust receipt, and he is then enabled to secure his raw material, manufacture and sell his goods. He is requested to place the bank in funds to meet the draft before maturity. ACCEPTANCES SECURED BY READILY MARKETABLE GOODS IN WAREHOUSE As a further example of this class of acceptance, let us take the case of a clothing manufacturer who desires to carry a stock of silks by means of the banker's acceptance. He places the merchandise in a warehouse, draws a draft on his bank for the value of the silk, attach- ing the warehouse receipts as collateral. The draft, after acceptance, is returned to him to be sold, the warehouse receipts being retained by the bank. The requirements as to warehouses in connection with bankers' acceptances will be better explained by a reference to the general statutory provisions, regulations and rulings of the Federal Reserve Board and opinions of counsel reviewed in the following pages; also the United States Warehouse Laws in Part V of this work. It may be said, in summary, that the silk must be stored in a ware- house which is independent of the manufacturer ; that is, the manu- facturer must not have any control of the silk as long as the ware- house receipts are outstanding. It is. of course, possible to secure possession of the original warehouse receipts by substituting other 234 Bank and Trade Acceptances warehouse receipts for the silk, but if the manufacturer desires to take down the silk without substitution, he should give the bank the cash value of the silk taken, for the bank should be secured either by warehouse receipts or cash all the time its acceptance is out. DRAFTS DRAWN FOR THE PURPOSE OF FURNISHING DOLLAR EXCHANGE It sometimes happens that persons in foreign countries, having obligations to meet in this country, find it necessary to do so by means of dollar exchange; that is, to remit in dollars in settlement of the outstanding obligations. The Federal Reserve Board has provided for such contingency and permission is given to banks thereby to accept drafts drawn on them by banks in certain foreign countries for the purpose of furnishing such dollar exchange. It is necessary, however, for a bank desiring to accept bills drawn for this purpose, to make application to the Fed- eral Reserve Board for permission to do so. The restrictions sur- rounding acceptances for this purpose are fully set forth in the present part of the work which discusses such classes of bank acceptances. TRADE ACCEPTANCES A trade acceptance is a draft drawn by the seller of goods on the purchaser and accepted by him. It must bear a statement on its face to the effect that it represents a purchase of goods by the acceptor from the drawer of the draft. Being drawn against actual current transactions and being paper bearing at least two names, preferential rates are made by Federal Reserve banks for the rediscount of trade acceptances as compared with single name paper. Such acceptances may also be purchased in the open market. If the acceptance is not paid at maturity and is properly protested, recourse may be had by the holder to any indorser and to the drawer. (For the discussion of the trade acceptance, its advantages, uses, applications, etc., see Part II of this work). SECTION I ACCEPTANCES BASED UPON TRANSACTIONS INVOLVING THE EXPORTATION OR IMPORTATION OF GOODS General Statutory Provisions Use of acceptances in foreign trade. — Any member bank is per- mitted to accept drafts or bills of exchange which grow out of trans- actions involving the exportation or importation of goods. OPINIONS OF COUNSEL AND RULINGS Relating to Acceptances Based Upon the Exportation or Importa- tion OF Goods Character of transaction on v/hich acceptances are based — Identifi- cation of specific goods not required. — Good faith must be relied upon to a large extent in determining whether an acceptance is based on a transaction involving the importation or exportation of goods. A member bank would be justified in putting on a notification, as, "this acceptance is based upon a transaction involving the importation or exportation of goods," provided it is satisfied that the statement by its customer is made in good faith. It is not necessary that the specific goods covered by an acceptance based upon an import or export transaction be identified at the time of the acceptance. Member banks may best protect themselves in determining whether acceptances are based upon the exportation or importation of goods by stipulating the right at times to ask for substantiation of assur- ances from a customer. Transactions must involve import or export of goods, otherwise insufficient. — A transaction in order that it may be the basis of a draft or bill eligible for acceptance by a member bank, must in itself involve the importation or exportation of goods. A transaction wholly inde- pendent of the transaction covering the importation or exportation of goods is not sufficient basis for an acceptance. 235 236 Bank and Trade Acceptances Drafts treated as drawn in domestic transactions. — Where the con- tract between a seller of goods who draws a draft and the purchaser is entirely independent of the contract for the export of the goods, the draft would have to be treated as drawn in a domestic transaction and would have to be accompanied by shipping documents or secured by warehouse receipts or other similar documents conveying or secur- ing title when accepted by the drawee bank. Option to secure drafts as in domestic transactions. — A dealer hav- ing drawn drafts accepted by a member bank in an export transaction, should be given the option, with the consent of the accepting bank, to secure such drafts in the manner required of those drawn in domes- tic transactions if he wishes to use the proceeds derived from the sale of the goods exported for purposes other than the payment of such acceptances. Goods ultimately intended for export insufficient basis. — Where a domestic corporation "A" enters into a contract with another domes- tic corporation "B" to furnish materials to be used by "B" in the manufacture of products which "B" is under contract to export, the mere fact that the material furnished is ultimately intended for export in some form cannot be said to merge the two transactions into one. The transaction between ''A" and "B" could not be said to involve the exportation of goods. Acceptance at the instance of exporter. — If a drawee bank accepts at the instance of the purchaser of goods, the purchaser having a contract to export such goods, the draft would grow out of a transaction involv- ing the export of goods, and could be accepted by the drawee bank. Goods purchased subsequent to acceptance. — Goods may be pur- chased and shipped subsequent to the time of the first acceptance, provided there is a definite bona fide contract for the shipment of the goods within a specified and reasonable time. Acceptances against future importation of goods. — A national bank may accept a draft, drawn for the purpose of importing goods, whether or not the sale of the goods under consideration has actually been consumated at the time of the acceptance of the draft, if the accepting Commercial Banking and Credits 237 bank is assured that the proceeds of the draft will ultimately be used solely for ihe purpose of financing a transaction involving the importa- tion of goods. It is not necessary that the goods to be sold be identi- fied at the time of acceptance. The accepting bank, however, must be reasonably sure that the draft is drawn for the purpose of financing a transaction involving the importation or exportation of goods, and that its proceeds will be used for that purpose. Delay in shipment of goods is immaterial. — The fact that there is a temporary delay in actual shipment of goods is immaterial, as was held in a case of a national bank which accepted a draft drawn upon it in settlement of advances for cotton being accumulated by cotton buyers for export. Acceptance of drafts when export contract not fulfilled. — A member bank would be justified, if fully secured, in accepting drafts drawn by a local cotton buying firm having a contract to sell to foreign buyers, if the transaction, after having been made in good faith, ultimately resulted in the sale of the cotton to an American instead of a foreign purchaser. It was assumed in this ruling that the bank had received permission from the Federal Reserve Board to accept drafts or bills of exchange drawn upon it; that the cotton buyers had a contract to sell cotton to a firm in Liverpool ; that they held the cotton subject to shipping receipt of the Liverpool firm ; and that because of freight rates and shipping conditions, the Liverpool firm changed its policy and directed the sale of the cotton. Drafts drawn against collateral of acceptances. — An acceptance house which has purchased an acceptance based on the importation or exportation of goods cannot reimburse itself by drawing a bill upon a national bank, pledging as collateral security for the bill the original acceptance. The new bill cannot properly be said to grow out of the original export transaction. Such a draft drawn under the above circumstances, because it is not an acceptance growing out of a trans- action involving the importation or exportation of goods, nor drawn by a bank or banker located in a foreign country, nor growing out of a transaction involving the domestic shipment or storage of goods, is ineligible. 238 Bank and Trade Acceptances / Acceptance agreements of dealers in same goods for export and domestic sale. — Where a dealer who is engaged in the purchase of the same character and class of goods for export and for domestic purposes desires to finance the sale and purchase of the goods to be exported, his agreement with a member bank accepting such draft should show that he has a contract for the export of the goods ; that the total amount of drafts under such credit will not exceed the aggregate amount involved in the export transaction ; that the proceeds of the drafts are to be used in connection with the export transaction ; and that the proceeds of the sale of goods exported will be applied in pay- ment of the acceptances unless the dealer has in the meantime placed the bank in funds to meet them at maturity, or has secured such acceptances in the manner required of domestic acceptances. Acceptances against gold coin and bullion. — Such acceptances are eligible, as gold coin and gold bars may be properly considered as goods. MATURITY RELATING TO BANK ACCEPTANCES BASED ON IMPORTS AND EXPORTS General Statutory Provisions Period of matturity. — Acceptances of member banks against imports and exports are limited to drafts "having not more than six months' sight to run, exclusive of days of grace." OPINIONS OF COUNSEL AND RULINGS Relating to Maturity of Bank Acceptances Based on Imports and Exports Duration of acceptance credits may exceed six months. — A national bank may enter into an agreement having more than six months to run, by the terms of which it may obligate itself for a period of time specified in the agreement to accept drafts drawn upon it, provided such drafts grow out of transactions involving the importation or exportation of goods, and the individual drafts have not more than six months' sight to run. This distinction is emphasized by the Commercial Banking and Credits 239 Board in an informal ruling as follows: While a letter of credit or credit agreement may lawfully be made by a national bank which will extend by its terms for a period exceeding six months, the agree- ment must not be of such a character as will impose upon the holders of drafts accepted thereunder any obligation to renew such drafts so that the period of acceptance shall exceed six months in duration as to any specified draft. Renewals of bank acceptances permitted to be made for reasonable periods. — Upon payment of an acceptance, the accepting bank may for a reasonable period accept new drafts for the financing of the original transaction, even after the shipment and delivery of the goods, provided such renewals be stipulated in the original contract as an incidental condition of the transaction of importation or exporta- tion upon which the acceptance is based. AMOUNT BANK MAY ACCEPT FOR ONE INTEREST General Statutory Provisions in Connection With the Above Re- lating TO Bank Acceptances Based on Imports and Exports Limitation of amount; exception. — No member bank is permitted to accept, whether in a foreign or domestic transaction, for any one per- son, company, firm, or corporation, to an amount equal at any time in the aggregate to more than ten percentum of its paid up and unim- paired capital and surplus, unless the bank is secured either by attached documents or by some other actual security growing out of the same transaction as the acceptance. OPINIONS OF COUNSEL AND RULINGS Relating to Amount Bank May Accept for One Interest on Transactions Involving Exports and Imports Secured bills; accepting bank must remain secured. — The ten per cent, limit upon the amount of acceptances which any member bank might make for one person, firm, company, or corporation, does not apply if "the bank is secured either by attached documents or by some other actual security growing out of the same transaction as the 240 Bank and Trade Acceptances i acceptance." If documents, which were attached at the time of accept- ance, are surrendered and no other security growing out of the same transaction is substituted, the ten per cent, limit will apply. The accepting bank must remain secured in the same manner prescribed during the life of the acceptance in order to be exempt from the ten per cent, limit. > What constitutes actual security — ^The only doubtful question is as to what constitutes some other actual security growing out of the same transaction as the acceptance. The ten per cent, limit does not apply where the acceptor holds (i) shipping documents, (2) ware- house receipts, or (3) Trust receipts which do not enable the borrower to obtain the goods for his own use. The ten per cent, limit does apply where the bank holds merely the ordinary trust receipt which gives it only a lien on the goods in the hands of the purchaser or on their proceeds. Trust receipts as actual security. — If an acceptance is secured by shipping documents which are surrendered by the acceptor for a trust receipt which permits the purchaser of the goods to retain control of the goods, the accepting bank cannot be said to be secured by some other actual security. A trust receipt, however, which does not permit the purchaser to procure control of the goods, may properly be said to be actual security. Effect and relation of United States Revised Statutes. Section 5200 to the ten per cent, limit; its application.— A member bank may legally purchase its own acceptance, but such a transaction is equiva- lent to a loan or advance to the customer for whom the acceptance is made and the liability of such customer becomes subject to the limi- tations of Section 5200, Revised Statutes. The limitation imposed by Section 5200 of the Revised Statutes on the amount of money which may be borrowed by any individual from a member bank does not apply to acceptances of said bank. Acceptances in addition to loans; exception.— Where a national bank has already loaned ten per cent, of its capital and surplus to a certain company, it may, while the loan is still outstanding, obligate Commercial Banking and Credits 241 itself as acceptor of a draft drawn by the same company. If, how- ever, a member bank purchases its own acceptance, it must treat the transaction as a loan and not as an acceptance, and can not in that case lend to, and accept for, the same firm in an aggregate amount in excess of ten per cent, prescribed by Section 5200 of the Revised Statutes. When drawer fails to provide funds to meet acceptance. — The ten per cent, limit imposed by Section 5200 of the Revised Statutes is not intended to apply to the mere acceptance of a bill of exchange, but the provision of the section would apply to the indebtedness arising between the drawer of the bill and the accepting bank in case the drawer fails to furnish funds with which to meet the acceptance at maturity. AGGREGATE AMOUNT BANK MAY ACCEPT General Statutory Provisions in Connection With the Above Re- lating TO Transactions Based on the Importation OR Exportation of Goods Limitation of amount fifty per cent. — No bank is permitted to accept bills to an amount equal at any time in the aggregate to more than one-half of its unimpaired capital stock and surplus, provided, how- ever, that the Federal Reserve Board, under such general regulations as it may prescribe, which shall apply to all banks alike, regardless of the amount of capital and surplus, may authorize any member bank to accept such bills to an amount not exceeding at the time in the aggregate one hundred percentum of its unimpaired paid up capital stock and surplus. REGULATIONS OF THE FEDERAL RESERVE BOARD In Connection with Aggregate Amount Bank May Accept Application required to be filed with Board for power to accept up to one hundred per cent. — Any member bank, having an unitn])aire(i capital equal to at least twenty percentum of its paid up capital, which desires to accept drafts or bills of exchange up to an amount not 242 Bank and Trade Acceptances exceeding at any time in the aggregate one hundred percentum of its paid up capital stock and surplus, may file an application for that purpose with the Federal Reserve Board, which application must be forwarded through the Federal Reserve bank of the district in which the applying bank is located. Report on application to be made by Federal Reserve bank to the Board. — The Federal Reserve bank is required to report to the Fed- eral Reserve Board upon the standing of the applying bank, stating whether the business and banking conditions prevailing in its district warrant the granting of such application. Reversal of approval. — The approval of any such application may be rescinded upon ninety days' notice to the bank affected. OPINIONS OF COUNSEL AND RULINGS In Connection With Aggregate Amount Bank May Accept No requirement of permission necessary to accept up to fifty per cent. — It is not necessary to obtain the authority of the Federal Reserve Board in the case of member banks desiring to undertake acceptance business unless the bank wishes to exceed fifty per cent, of its capital and surplus. Acceptances of correspondents under guaranty of national banks. — Drafts accepted by foreign correspondents at the request and under the guaranty of a national bank in the United States should be reported as a direct liability of such national bank and should be treated as subject to the limitations imposed by the Federal Reserve Act on the acceptance powers of national banks. Bank purchasing own acceptances. — When a member bank pur- chases its own acceptances before maturity, such acceptances need not be included in the aggregate of acceptances authorized by Section 13 of the Federal Reserve Act. Limitations of Section 5202. — The limitations imposed by Section 5202, Revised Statutes, on the liabilities incurred by any national bank do not apply to acceptances of such banks. Commercial Banking and Credits 243 SUMMARY OF BANK ACCEPTANCES BASED ON IMPORTS AND EXPORTS From the foregoing, it may be noted by way of general summary, that: 1. A member bank may not accept bills to a greater amount than fifty per cent, of its capital and surplus, unless the Federal Reserve Board has authorized it to accept to one hundred per cent. 2. The amount of domestic bills accepted shall in no event exceed fifty per cent, of capital and surplus. 3. Acceptances purchased by the accepting banks are exempt from the above limitations. BANK ACCEPTANCES EXECUTED TO FURNISH DOLLAR EXCHANGE General Statutory Provisions Acceptances executed to furnish dollar exchange. — Any member bank may accept drafts or bills of exchange drawn upon it having not more than three months' sight to run, exclusive of days of grace, drawn under regulations to be prescribed by the Federal Reserve Board by banks or bankers in foreign countries, or dependencies, or insular possessions of the United States, for the purpose of furnishing dollar exchange as required by the usages of trade in the respective countries, dependencies or insular possessions. REGULATIONS OF THE FEDERAL RESERVE BOARD Ix Connection With Bank Acceptances Executed to Furnish Dollar Exchange Application for permission to accept. — Any member bank desiring to accept drafts drawn by banks or bankers in foreign countries or dependencies or insular possessions of the United States for the pur- pose of furnishing dollar exchange must first make an application to the Federal Reserve Board setting forth the usages of trade in the respective countries, dependencies, or insular possessions in which said banks or bankers are located. Conditions upon which approval will be made. — If the Federal Reserve Board should determine that the usages of trade in such countries, dependencies, or possessions, require the granting of the acceptance facilities applied for, it will notify the applying bank of its approval and will also publish in the Federal Reserve bulletin the name or names of those countries, dependencies, or possessions, in which banks or bankers are authorized to draw on member banks whose applications have been approved for the purpose of furnishing dollar exchange. The Federal Reserve Board reserves the right to 244 Commercial Banking and Credits 245 modify, or on ninety days' notice, to revoke its approval either as to any particular member bank or as to any foreign country or depend- ency or insular possession of the United States in which it has author- ized banks or bankers to draw on member banks for the purpose of furnishing dollar exchange. ANNOUNCEMENTS OF THE FEDERAL RESERVE BOARD The purpose of this Act and the regulations made pursuant thereto was to enable the American banks to provide dollar exchange in coun- tries where the check is not the current means of remittance in pay- ment of foreign debts, but where the three months' banker's draft is generally used for that purpose. The banker's custom of selling three months' drafts in preference to checks originated in countries where the mail connections were irregular and the foreign exchange market was a limited one, and where it would have been difficult for him to draw in time to forward it by the same mail, whereas, in draw- ing the three months' draft, he would feel assured of being able to forward remittances before his obligation fell due. Such conditions do not exist between England and France and the United States. Member banks are now permitted to accept foreign drafts drawn upon them by banks or bankers in the following countries : Porto Rico, Santo Domingo, Costa Rico, Peru, Chili, Brazil, Venezuela, Argentina, Bolivia, Columbia, Ecquador, Nicarauga, Trinidad and Urugway. It is understood in connection with the above that such drafts are to be drawn for the purpose of furnishing dollar exchange as required by the usages of trade in the respective countries. MATURITY IN CONNECTION WITH BANK ACCEPTANCES EXECUTED TO FURNISH DOLLAR EXCHANGE Period of maturity. — Member banks may accept drafts drawn to furnish dollar exchange having not more than three months' sight to run, exclusive of days of grace. AMOUNT ACCEPTABLE BY ONE MEMBER BANK FOR ONE INTEREST Limitation of per cent. — No member bank is permitted to accept drafts or bills of exchange executed to furnish dollar exchange for 246 Bank and Trade Acceptances any one bank to an amount exceeding- in the aggregate ten percentum of the paid up and unimpaired capital and surplus of the accepting bank unless the draft or bill of exchange is accompanied by docu- ments conveying or securing title or by some other adequate security. AGGREGATE AMOUNT MEMBER BANK MAY ACCEPT In Connection with Bank Acceptances Executed to Furnish Dollar Exchange Limitation of per cent. — No member bank is permitted to accept such drafts or bills of exchange in an amount exceeding at any time in the aggregate one-half of its paid up and unimpaired capital and surplus. OPINIONS OF COUNSEL AND RULINGS In Connection with Aggregate Amount Member Bank May Accept Separate limits on the two classes of acceptances. — The fifty per cent, limit imposed upon the amount of drafts which a member bank may accept for the purpose of furnishing dollar exchange, is separate and distinct from, and not included in the limits imposed by Section 13, upon the amount of drafts or bills of exchange drawn against a shipment of goods or against warehouse receipts covering readily marketable staples which a member bank may accept. Member banks may, therefore, accept such bills even though their acceptances for other purposes aggregate fifty per cent, (or one hundred per cent.) of their capital and surplus. The limitations imposed by Section 5202 Revised Statutes, and the liabilities incurred by any national bank do not apply to acceptances of such banks. BANK ACCEPTANCES BASED ON DOMESTIC SHIPMENTS OF GOODS General Statutory Provisions Bank acceptances in domestic trade. — Any member bank may accept drafts drawn upon it which grow out of transactions involving the domestic shipments of goods provided shipping documents conveying or securing title are attached at the time of acceptance. OPINIONS OF COUNSEL AND RULINGS Relating to Bank Acceptances Based on Domestic Shipments of Goods Shipping documents. — Documents conveying or securing title which are an essential part of the transaction based on the domestic ship- ment of goods must be made out or endorsed so as to convey or secure title to the accepting bank. Documents not required to be physically attached. — The fact that Section 13 provides that shipping documents should be "attached" should not be construed so as to require the documents to be physi- cally fastened to the draft. It is sufificient if the accepting bank has possession of the documents at the time of acceptance. If placed in possession of the bank's agent and under control of the bank, such documents could clearly be considered as in its possession. Transaction not required to involve sale of goods. — A member bank may accept a draft drawn against a shipment of goods from a corpora- tion to its agent or bank even though no sale of the goods is involved in the transaction. In any case where a draft is drawn against a ship- ment of goods in a transaction which does not involve the sale of those goods, the maturity of the draft should approximate the dura- tion of their transit. In such a case, the law contemplates that the 247 248 Bank and Trade Acceptances acceptance of the draft should be for the purpose of financing the ship- ment, and that it should not be by the means of furnishing a credit for any other purpose. Acceptance must arise out of actual transaction. — A draft which has been drawn by the purchaser of the goods against a national bank is not eligible for acceptance by that bank merely because it is secured by a bill of lading covering the goods bought. The law contemplates some actual connection between the acceptance of the draft and the transaction involving the sale and shipment of the goods, that is, it is evidently intended that the draft should be drawn to finance that transaction. If a seller ships goods and mails the bill of lading to the purchaser, and on arrival of the bill of lading the purchaser draws on his own bank attaching the bill of lading as security and offers it for acceptance, the transaction is merely a straight loan to the drawer secured by a bill of lading. Retention or release of shipping documents against acceptance. — The bank is believed to have the right, if it becomes necessary to do so, to release either the shipping document or warehouse receipt, pro- vided the draft or drafts accepted by one person do not exceed ten per cent, of the capital and surplus of the accepting bank. This is a question, however, which should be determined by the bank itself. Retention or release of warehouse receipts against acceptance. — It has been ruled proper for a bank not to release warehouse receipts other than in exceptional cases, this being purely a matter of agree- ment as between the bank and its customers. The Federal Reserve bank, in rediscounting such acceptances, may reasonably take into consideration the question of whether or not they are secured or unse- cured at the time they are offered for rediscount. Maturity in Connection WiTk Bank Acceptances Based on Domestic Shipments of Goods General Statutory Provisions Period of maturity. — Any member bank may accept such drafts drawn upon it having not more than six months' sight to run, exclu- sive of days of grace. Commercial Banking and Credits 249 OPINIONS OF COUNSEL AND RULINGS In Connection with Maturity of Bank Acceptances Based on Domestic Shipments of Goods Duration of letters of credit. — The agreement must not be of such a character as will impose upon the holders of the drafts accepted thereunder any obligation to renew such drafts so that the period of acceptance shall exceed six months in duration as to the specified time, notwithstanding the fact that a letter of credit or credit agreement made by a national bank extends for a period of six months. (See "Bank Acceptances Based on Imports and Exports" for "Amount Bank May Accept for One Interest"). AGGREGATE AMOUNT BANK MAY ACCEPT Aggregate amount bank may accept up to one hundred per cent. — No bank is permitted to accept such bills to an amount equal at any time in the aggregate to more than one-half of its unimpaired and paid up capital stock and surplus, provided, however, that the Federal Reserve Board under such general regulations which it may pre- scribe, which shall apply to all banks alike regardless of the capital stock and surplus, may authorize any member bank to accept such bills to an amount not exceeding at any time in the aggregate one hun- dred percentum of its paid up and unimpaired capital stock and sur- plus, and provided further, that the aggregate of acceptances growing out of domestic transactions shall in no event exceed fifty percentum of its capital stock and surplus. OPINIONS OF COUNSEL AND RULINGS Relating to Aggregate Amount Bank May Accept Bank purchasing own acceptances. — When a member bank pur- chases its own acceptances before maturity, such acceptances need not be included in the aggregate of acceptances authorized by Sec- tion 13. Section 5202 inapplicable to acceptances. — The hmitations imposed by Section 5202 Revised Statutes on the liabilities incurred by any national bank do not apply to acceptances of such banks. BANK ACCEPTANCES SECURED BY WAREHOUSE RECEIPTS General Statutory Provisions Acceptances by member banks. — Any member bank may accept drafts or bills of exchange drawn upon it which are secured at the time of acceptance by a warehouse receipt or other such document con- veying or securing title covering readily marketable staples. OPINIONS OF COUNSEL AND RULINGS Relating to Bank Acceptances Secured by Warehouse Receipts Eligible Security Warehouse receipts required to be issued by warehouses independent of borrower. — Warehouse receipts offered as security for bills accepted by member banks must be issued by warehouses which are independent of the borrower. Where a corporation is formed as a subterfuge for the purpose of evading the spirit of the Board's ruling, this fact should be taken into consideration by a member bank accepting the bill and by the Federal Reserve bank to which it is offered for discount. If the borrower exercises such control over the corporation issuing the warehouse receipt as to give him control over the goods in stor- age, the purpose of requiring a receipt of the independent warehouse- man would be defeated. The corporation issuing such rceipt must be organized in good faith as an independent corporation and its affairs must be administered by duly authorized officers and agents inde- pendent of the borrower. Relation between warehouse corporation and borrower. — Where a separate corporation has been created and the warehouse receipts are issued by that corporation and not by the borrower, the requirements of the Board would appear to have been met. However, where both corporations have practically the same officers, the manager of the 250 Commercial Banking and Credits 251 warehouse appointed to execute the receipts should not be an employee of the borrowing company, as the Board requires that the receipts should be issued by a company independent of the borrower, and this requirement should be met in substance as well as in form. Control of warehouse by acceptors' representatives. — An informal ruling has been made by the Board in connection with the following: A borrowing corporation takes receipts for goods and materials stored in a warehouse controlled by a separate corporation engaged solely in the warehouse business, the entire stock of which is owned by the prospective borrower. If a representative of the accepting bank is given control of the warehouse under a proper resolution of the direc- tors of the warehouse corporation, the fact that the stock of the cor- poration is owned by the borrower should not prevent the acceptance of drafts secured by the warehouse receipts. It should be agreed, however, that if by any future action of the warehouse corporation an attempt is made to exercise control over the warehouse, the represen- tative of the acceptor should have the right to move the goods and to place them in storage elsewhere at the expense of the warehouse cor- poration. Warehouse receipts issued by lessee. — A can goods concern pro- poses to place part of its readily marketable goods and materials in storage with a lessee of part of its premises. The lessee is then to issue warehouse receipts to the owner of the goods, which receipts are to be issued as security for drafts drawn against and accepted by a member bank. If the premises in question are actually turned over to the lessee under a bona fide lease, the lessee being independent of the borrower and having entire custody and control of the goods, there would seem to be no objection to a member bank accepting drafts against the security of warehouse receipts issued by such lessee. It should, how- ever, be expressly understood and agreed that the borrower shall not have access to the premises except with the permission of the lessee and that he shall exercise no control of any sort over the goods against which warehouse receipts are issued. The warehouse receipts must, of course, be in form to properly convey and secure title to the bank. Receipts of custodian of wool as a warehouse receipt. — Custodian's certificate or receipt, if issued in proper form to convey or secure title, 2C2 Bank and Trade Acceptances may be treated as a warehouse receipt and acceptance of member bank under such conditions would be eligible for rediscount. The wool^ in the above case was stored in buildings under control of custodian entirely independent of borrower. Ineligible Security Chattel mortgages.— Drafts or bills of exchange drawn in domestic transactions against a national bank cannot be accepted when secured by a chattel mortgage on cattle, but only when accompanied by ship- ping documents or when secured by a warehouse receipt or other similar document conveying or security title to readily marketable staples. While cattle may be treated as readily marketable staples, a chattel mortgage is not considered a document similar to a warehouse receipt, since the borrower retains the possession of the goods and conveys to the bank only the legal title. Collateral notes secured by chattel mortgages. — A national bank is not authorized to accept a draft secured by collateral notes which are in turn secured by chattel mortgages on cattle. Member banks are not authorized to accept drafts of a cattle-loan company secured by notes of the owner of the cattle, although such notes may be secured by a chattel mortgage accompanying the draft at the time of acceptance. Bills of sale. — A bill of sale is not a receipt similar to a warehouse or terminal receipt. It is merely in substance a chattel mortgage of goods in the hands of the drawer and not a receipt for goods sold in the hands of some third party "independent of the borrower." Security not specified. — The acceptance of a draft by a member bank against an acceptance agreement which purports to assign to the bank certain collateral security, but which does not specifically mention any security as assigned, is an ordinary accommodation acceptance and is not authorized by law. Substitution of Warehouse Receipts Substitution. — It is held that there is no objection to permitting mills to substitute other warehouse receipts for cotton receipts during the life of an acceptance. Commercial Banking and Credits 253 MATURITY (For maturity see "Bank Acceptances Based on Domestic Ship- ments of Goods"). AMOUNT BANK MAY ACCEPT FOR ONE INTEREST (Regarding the above, see "Bank Acceptances Based on Imports and Exports"). AGGREGATE AMOUNT BANK MAY ACCEPT (See "Bank Acceptances based on Domestic Shipments of Goods"). INVESTMENTS IN ACCEPTANCES BY MEMBER BANKS General Statutory Provisions U. S. Revised Statutes, Section 5200, as Amended Ten per cent, limit on liability of any one interest to a national bank; exceptions. — The total liabilities to any association, of any person, or of any company, corporation, or firm for money borrowed, including any liabilities of a company or firm, and the liabilities of the several members thereof, shall at no time exceed ten percentum of the amount of the capital stock of such association, actually paid in and unim- paired, and ten percentum of its unimpaired surplus fund; provided, however, that: 1. The discount of bills of exchange drawn in good faith against actually existing values ; 2. The discount of commercial or business paper actually owned by the person, company, corporation, or firm, negotiating the same; and 3. The purchase or discount of any note or notes secured by not less than a like face amount of bonds of the United States issued since April 24, 1917, or certificates of indebtedness of the United States; shall not be considered as money borrowed within the meaning of this section; but the total liabilities to any association, of any person, or of any company, corporation, or firm, upon any note or notes pur- chased or discounted by such association and secured by such bonds or certificates of indebtedness shall not exceed (except to the extent permitted by rules and regulations prescribed by the Comptroller of the Currency, with the approval of the Secretary of the Treasury) ten percentum of such capital stock and surplus fund of such association. OPINIONS OF COUNSEL AND RULINGS In Connection with Investments in Acceptances by Member Banks Purchase or Discount of Acceptances of Other Banks Bills of exchange include bank acceptances. — Bills of exchange may be taken as including acceptances, since a bill does not lose its char- acteristics as such when accepted by the drawee. 254 Commercial Banking and Credits 255 Bills discounted before acceptance. — A bill of exchange discounted before acceptance may be said to be drawn against actually existing value only when it is accompanied by shipping documents, warehouse receipts, or other papers securing title to the goods sold. Bills secured by shipping documents or pledge of goods. — A bill secured by shipping documents, or by the pledge of goods actually sold, might be discounted by a member bank before acceptance with- out being subject to the limitations imposed by Section 5200, since this would constitute a bill drawn in good faith against actually ex- isting value. Bills discounted after acceptance. — If the bill is discounted after acceptance it may be treated as drawn against actually existing values, if drawn against the drawee at the time of, or within a reasonable time after, the shipment or delivery of the goods sold. There must be reasonable grounds to believe, at the time the bill is drawn, that the goods are in existence in the hands of the drawee either in their origi- nal form or in the shape of the proceeds of their sale. Acceptance discounted after removal of attached documents. — When such bill has been accepted by the drawee and the documents attached have been removed, though the direct obligation of the drawee to pay such bill at maturity may be said to be substituted for the "actual value" against which the bill was originally drawn, nevertheless, when discounted by a bona fide owner for value, its discount would not be subject to the limitations of Section 5200 since it would still come within the classification of commercial or business paper actually owned by the person negotiating the same. Should the drawee who accepts the bill, however, attempt to dis- count it with a member bank it would be subject to the limitations of Section 5200 since in that case the party primarily liable would in effect borrow money from the bank on its own obligation. Discount of acceptances as business paper. — It is held by the Board that if a firm is a bona fide owner for value of the acceptances of any particular institution and such acceptances are sold to or discounted with a member bank, the acceptances could no doubt be treated as 256 Bank and Trade Acceptances commercial or business paper actually owned by the party negotiating them and would therefore be excepted from the limitations imposed by Section 5200, Revised Statutes. Purchase by National Bank of Its Own Acceptances Bank permitted to purchase its own acceptances. — A member bank may legally purchase its own acceptances, but such a transaction is equivalent to a loan or advance to the customer for which the accept- ance is made and the liability of such customer becomes subject to the limitations of Section 5200 of the Revised Statutes. Exemptions from limitations of Section 13. — When a bank purchases its own acceptances before maturity, such acceptance need not be included in the aggregate of acceptances authorized by Section 13. Reissue of acceptances. — When a bank buys its own acceptances, they are to be recorded as loans subject to the limitations of Section 5200 and the right of the bank to resell or reissue such acceptances, is, in the opinion of counsel, fully recognized by the authorities and where this is done, they may be treated as acceptances outstanding and not as loans. Rediscount of such acceptances. — An acceptance which has been purchased by the accepting bank and subsequently rediscounted with its Federal Reserve bank is not subject to the limitations of Section 5200 of the Revised Statutes. SYNDICATE ACCEPTANCE CREDITS Policy of Federal Reserve Board. — The Federal Reserve Board has issued a memorandum stating its policy in dealing with acceptances drawn under credits extending over a period of one or two years, which is reviewed in the following. Authorization ; duration of credits ; rate ; character ; approval of Fed- eral Reserve Board. — In this memorandum, the Board authorized the banks, during a period which may be declared ended at any time, to proceed upon certain principles which may be summed up as follows: 1. Acceptance credits open for periods in excess of ninety days should only, in exceptional cases, extend over a period of more than one year, and in no case for a time exceeding two years. 2. Banks which are members of groups opening these credits should not buy their own acceptances, and where an agreement is made with the drawer for the purchase of acceptances for future delivery, the rate should not be a fixed one, but should be based upon the rate ruling at the time of the sale. 3. Transactions covered by these credits should be of a legitimate commercial nature, and acceptances must be eligible according to the rules and regulations of the Board. 4. Whenever syndicates are formed for the purpose of granting acceptance credits for more than moderate amounts, Federal Reserve banks should be consulted with regard to the transaction. The ques- tion of eligibility, both from the standpoint of the character of the goods and of the amount involved, will be passed upon by the Federal Reserve bank, subject to the approval in each case of the Federal Reserve Board. Quantity as well as quality the controlling factors. — It must be understood, in passing ujjon these transactions, that not only quality but also quantity must be the controlling factors. The aggregate of these acceptances should not be permitted to constitute the greater portion of outstanding acceptances at any time, and it must be undcr- 257 258 Bank and Trade Acceptances stood that while the Federal Reserve banks and the Federal Reserve Board might look w^ith favor upon a transaction as long as the total amount involved is not excessive, transactions of exactly the same character may be ruled out whenever the aggregate amount of out- standing acceptances of this character becomes in the opinion of the Federal Reserve Board, unduly large. COMMERCIAL BANKING AND CREDITS OPEN MARKET TRANSACTIONS IN ACCEPTANCES, BILLS OF EXCHANGE AND CABLE TRANSFERS SECTION II OPEN MARKET TRANSACTIONS IN ACCEPTANCES, BILLS OF EXCHANGE AND CABLE TRANSFERS General Statutory Provisions Cable transfers, bank acceptances and bills of exchange. — Any Fed- eral Reserve bank may, under rules and regulations prescribed by the Federal Reserve Board, purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corpo- rations, or individuals, cable transfers and bankers' acceptances and bills of exchange, of the kinds and maturities by the Federal Reserve Act made eligible for rediscount, with or without the indorsement of a member bank. Commercial bills. — Every Federal Reserve bank shall have power to purchase from member banks and to sell with or without its in- dorsement, bills of exchange arising out of commercial transactions, as hereinafter defined. (See General Regulations and Rulings, fol- lowing). GENERAL REGULATIONS AND RULINGS Relating to Open Market Transactions Conditions governing eligibility. — The Federal Reserve Board, ex- ercising its statutory right to regulate the purchase of bills of ex- change and acceptances, has determined that a bill of exchange or accejitance to be eligible for purchase by Federal Reserve banks, (a) Must not have been issued for carrying or trading in stocks, bonds, or other investment securities, except bonds and notes of the Government of the United States; (b) Must not be a bill the proceeds of which have been used or are to be used for permanent or fixed investments of any kind, such as 261 262 Bank and Trade Acceptances land, buildings, or machinery, or for investments of a merely specu- lative character ; (c) Must have been accepted by the drawee prior to purchase by a Federal Reserve bank unless it is accompanied and secured by ship- ping documents or by a v^arehouse, terminal or other similar receipt conveying or security title ; (d) May be secured by the pledge of goods, wares, merchandise, or agricultural products, including live stock, provided it is otherwise eligible. In addition to the above general requirements, each bill of exchange and trade acceptance purchased under the terms of this regulation must also conform to the following: To be eligible for purchase, the bill must have arisen out of an actual commercial transaction, domestic or foreign ; that is, it must be a bill which has been issued or drawn for agricultural, industrial or commercial purposes, or the proceeds of which have been used or are to be used for the purpose of producing, purchasing, carrying, or marketing goods in one or more of the steps of the process of produc- tion, manufacture, or distribution. It must have a maturity at time of purchase of not more than ninety days, exclusive of days of grace. OPINIONS OF COUNSEL AND RULINGS Relating to Open Market Transactions Promissory notes not included. — Regarding the eligibility of prom- issory notes, the Federal Reserve Board has reached the conclusion, in which it is sustained by opinion of counsel, that promissory notes, even though bearing an additional indorsement, must be regarded as excluded from open market purchases. Eligible paper. — There remain, therefore, as eligible for purchase, "cable transfers" and "bills of exchange," the latter being of two kinds, first, so-called foreign bills of exchange, and second, domestic acceptances drawn by one party on another, as for instance, by a seller of goods upon the purchaser, giving rise to a trade acceptance, either accepted or not accepted at the time of purchase. Whether the Fed- eral Reserve banks should engage in such open market transactions rests entirely with them and not with the Federal Reserve Board. Commercial Banking and Credits 263 Banks are cautioned that no bill be bought in the open market, which, if indorsed by a member bank, would otherwise be ineligible for re- discount under Section 13 of the Federal Reserve Act. (See General Regulations and Rulings, preceding). Promissory notes not eligible. — Promissor}^ notes, as distinguished from bills of exchange, whether of one or more names, are not eligible for such purchase. Eligibility of commodity paper. — The purchase of commodity loans from member banks without their indorsement would not come within the provisions of the law unless there is two name commodity paper or such paper can be created in connection with commodity loans. TRANSACTIONS IN BANK ACCEPTANCES IN THE OPEN MARKET Definition of bankers' acceptances. — A banker's acceptance is a bill of exchange, of which the acceptor is a bank or trust company, or a firm, person, company, or corporation, engaged in the business of granting bankers' acceptance credits. ELIGIBLE BANK ACCEPTANCES General Statutory Provisions Cable transfers and bankers' acceptances. — Any Federal Reserve bank may purchase and sell cable transfers and bankers' acceptances of the kinds and maturities by the Federal Reserve Act made eligible for rediscount, with or without the indorsement of a member bank. (See Regulations following). REGULATIONS OF THE FEDERAL RESERVE BOARD Conditions governing eligibility. — To be eligible for purchase, the bill must have been drawn under a credit open for the purpose of con- ducting or settling accounts resulting from a transaction or transac- tions involving: (i) The shipment of goods between the United States and any 264 Bank and Trade Acceptances foreig-n country, or between the United States and any of its depend- encies or insular possessions or between foreign countries ; (2) The shipment of goods within the United States, provided the bill at the time of its acceptance is accompanied by shipping docu- ments ; (3) The storage within the United States of readily marketable goods, provided the acceptor of the bill is secured by warehouse, ter- minal or other similar receipt; (4) The storage within the United States of g-oods which have been actually sold, provided the acceptor of the bill is secured by the pledge of such goods ; (5) It must be a bill drawn by a bank or banker in a foreign country, or dependency, or insular possession of the United States, for the purpose of furnishing dollar exchange. The bank or banker in the latter case drawing the bill must be in a country, dependency, or pos- session, whose usages of trade have been determined by the Federal Reserve Board to require the drawing of bills of this character. OPINIONS OF COUNSEL AND RULINGS Relating to Eligible Bank Acceptances Accepted commercial paper secured by bullion shipments. — Gold bars may be considered as goods, and, therefore, sixty day bills, when accepted by banks and bankers against such shipments, would be eligible for purchase by Federal Reserve banks as based upon or in- volving the exportation of goods. Gold coin may also be properly considered as goods, and, therefore, a bill of exchange drawn to finance a shipment of gold coin from this country is eligible for purchase by a Federal Reserve bank if otherwise in conformity with the provisions of the law and the regulations of the Federal Reserve Board. INELIGIBLE BANK ACCEPTANCES Opinions of Council and Rulings Acceptances not based on sales and not secured, ineligible. — Accept- ances which are drawn by a manufacturer and accepted by a trust company, not a member of the Federal Reserve System, the proceeds Commercial Banking and Credits 265 of which are to be used for purchases of raw material and payment for labor, where the goods have not been sold, and no warehouse receipts or other instruments could be furnished, are held not to be eligible for purchase by a Federal Reserve bank. Acceptances secured by bill of sale ineligible. — A banker's accept- ance drawn for the purpose of purchasing goods secured by a bill of sale of stock in hand is not eligible for purchase by Federal Reserve banks. Bills payable outside the United States ineligible. — Under the reg- ulations of the Federal Reserve Board defining bankers' acceptances, any bill which is payable elsewhere than in the United States would not be eligible for purchase as a banker's acceptance, even though eligible in all other respects, but might, however, be purchased as a bill of exchange payable in a foreign country. EVIDENCE OF ELIGIBILITY AND REQUIREMENT OF STATEMENTS Regulations of the Federal Reserve Board Evidence of eligibility ; exception of bills accepted by national banks. A Federal Reserve bank must be satisfied either by reference to the acceptance itself, or otherwise, that it is eligible for purchase. Satis- factory evidence of eligibility may consist of a stamp or certificate affixed by the acceptor in form satisfactory to the Federal Reserve bank. No evidence of eligibility is required with respect to a bill accepted by a national bank. Requirement of statements. — Bankers' acceptances, other than those accepted or indorsed by member banks, shall be eligible for purchase only after the acceptor has furnished a satisfactory statement of financial condition in form to be approved by the Federal Reserve Board, and has agreed in writing with a Federal Reserve bank to inform it upon request concerning the transactions underlying such acceptances. 266 Bank and Trade Acceptances OPINIONS OF COUNSEL AND RULINGS Relating to Evidence of Eligibility and Requirement of State- ments Responsibility for eligibility; statement required to be satisfactory in form. — Ultimate responsibility in purchasing acceptances is held to rest with Federal Reserve banks. The announcement that the Fed- eral Reserve Board will require statements satisfactory to it in con- nection with acceptances is held to mean that the statement shall be satisfactory in form. MATURITY General Statutory Provisions Maturity. — Any Federal Reserve bank may purchase and sell cable transfers and bankers' acceptances of the kinds and maturities made eligible for rediscount by the Federal Reserve Act. REGULATIONS OF THE FEDERAL RESERVE BOARD Requirements as to maturity. — To be eligible for purchase, the bill must have a maturity at the time of purchase of not more than three months, exclusive of the days of grace. TRANSACTIONS IN BILLS OF EXCHANGE AND TRADE ACCEPTANCES Definition of bill of exchange. — The regulations of the Federal Re- serve Board define a bill of exchange to be an unconditional order in writing, addressed by one person to another, other than a banker, signed by the person giving it, requiring the person to whom it is addressed to pay, in the United States, at a fixed or determinable future time, a sum certain in dollars to the order of a specified person. Definition of trade acceptance. — A simple definition of a trade accep- tance would be a bill of exchange drawn by the seller on the pur- chaser of goods sold, and accepted by such purchaser. Commercial Banking and Credits 267 ELIGIBLE BILLS AND TRADE ACCEPTANCES General Statutory Provisions Eligible bills. — Any Federal Reserve bank may purchase and sell in the open market bills of exchange of the kinds and maturities made eligible for rediscount by the Federal Reserve Act. (See Regulations following) . REGULATIONS OF THE FEDERAL RESERVE BOARD General conditions of eligibility. — A bill of exchange or acceptance to be eligible for purchase by Federal Reserve banks, (i) must have been accepted by the drawee prior to purchase by a Federal Reserve bank unless it is accompanied and secured by shipping documents, or by a warehouse, terminal or other similar receipt conveying or secur- ing title ; (2) May be secured by the pledge of goods, wares, merchandise or agricultural products, including live stock, provided it is otherwise eligible. Each bill of exchange and trade acceptance purchased must also, in addition to the above requirements, conform to the more specific requirements set forth in the following: To be eligible for purchase, bills must have arisen out of an actual commercial transaction, domestic or foreign ; that is, it must be a bill which has been issued or drawn for agricultural, industrial or com- mercial purposes, or the proceeds of which have been used or are to be used for the purpose of producing, purchasing, carrying or market- ing goods in one or more of the steps of the process of production, manufacture or distribution, and must have a maturity at the time of purchase of not more than ninety days exclusive of days of grace, INELIGIBLE BILLS AND TRADE ACCEPTANCES Regulations of Federal Reserve Board Finance paper. — To be eligible for purchase by l''cdcral Reserve banks, a bill of exchange or acceptance must not have been issued for carrying on trading in stocks, bonds, or other investment securities, except bonds and notes of the government of the United States ; and must not be a bill the proceeds of which have been used or are to be 268 Bank and Trade Acceptances used for permanent or fixed investments of any kind, such as land, buildings, or machinery, or for investments of a merely speculative character. OPINIONS OF COUNSEL AND RULINGS Relating to Ineligible Bills and Trade Acceptances Drafts drawn on corporation by agent ineligible. — Instruments in the form of bills of exchange, drawn by an agent of a corporation upon the corporation itself, are not bills of exchange, such as are eligible for purchase in the open market by Federal Reserve banks. Paper stamped "trade acceptance" of no value as such. — The fact that a land company has stamped a bill a "trade acceptance" and has accepted such bill does not in itself make it a trade acceptance. EVIDENCE OF ELIGIBILITY AND REQUIREMENT OF STATEMENTS Regulations of Federal Reserve Board Evidence of eligibility; requirement of statements. — A Federal Re- serve bank shall take such steps as it deems necessary to satisfy itself as to the eligibility of the bill offered for purchase unless it presents prima facie evidence thereof or bears a stamp or certificate affixed by the acceptor or drawer showing that it is a trade acceptance. A bill is not eligible for purchase unless indorsed by a member bank, and in case there is no indorsement by such member bank, a satisfactory statement of the financial condition of one or more of the parties thereto must be furnished. MATURITY General Statutory Provisions and Regulations of the Federal Reserve Board Any Federal Reserve bank may purchase and sell bills of exchange of the kinds and maturities by the Federal Reserve Act made eligible for rediscount, and in any case, such maturities must not exceed ninety days, exclusive of days of grace, at the time of purchase. COMMERCIAL BANKING AND CREDITS ADVANCES BY FEDERAL RESERVE BANKS SECTION III COMMERCIAL BANKING AND CREDITS Advances By Federal Reserve Banks 1. General Statutory Provisions. 2. Security. 3. Maturity. General Statutory Provisions Maturity; security; eligible paper; U. S. obligations. — Any Federal Reserve bank may make advances to its member banks on their prom- issory notes for a period not exceeding fifteen days, at rates to be established by such Federal Reserve banks, subject to the review and determination of the Federal Reserve Board, provided such promissory notes are secured by such notes, drafts, bills of exchange, or bankers' acceptances as are eligible for rediscount or for purchase by Federal Reserve banks under the provisions of the Federal Reserve Act, or by the deposit or pledge of bonds or notes of the United States. SECURITY Advances on bonds or notes of the United States. — Any Federal Reserve bank may make advances to member banks on their promis- sory notes, secured either by such notes, drafts, bills of exchange, or bankers' acceptances as are eligible for rediscount or purchase by Federal Reserve banks, or by the deposit or pledge of bonds or notes of the United States. OPINIONS OF COUNSEL AND RULINGS Relating to Security on Advances by Federal Reserve Banks Indorsement of collateral. — Eligible paper pledged as security for a promissory note of a member bank on which an advance is being made by a Federal Reserve bank need not be indorsed by such member bank if such eligible paper is already in negotiable form. 271 272 Bank and Trade Acceptances Collateral of Government bonds. — Any member bank which has itself purchased obligations of the United States may procure advances from its Federal Reserve bank for not exceeding fifteen days on its own promissory note, provided such note is secured by a deposit or pledge of bonds or notes of the United States. County warrants ineligible. — County warrants are not eligible as security for advances by Federal Reserve banks. Member banks, in procuring advances from Federal Reserve banks on promissory notes, must secure such notes by paper eligible for rediscount, or for pur- chase by Federal Reserve banks, or by bonds or notes of the United States. Farm loan bonds ineligible. — Farm loan bonds being issued by Fed- eral farm land banks, which are incorporated under Federal law, are not obligations of the United States, and are, therefore, not eligible as collateral for promissory notes of member banks. For conditions governing eligibility of acceptances, drafts and notes, see "Rediscount of promissory notes ; eligible drafts and trade accep- tances ; eligible agricultural paper; eligible commodity paper; eligible bank acceptances." MATURITY General Statutory Provisions Period for which advances may be made. — Any Federal Reserve bank may make advances to its member banks on their promissory notes for periods not exceeding fifteen days. OPINIONS OF COUNSEL AND RULINGS Notes due on Sunday or legal holiday. — If by reason of a State law, paper falling due on Saturday or Sunday must be collected one or two days before its apparent maturity or one or two days thereafter, in- terest should be charged accordingly. Renewals. — Renewals may properly be made by Federal Reserve banks on fifteen day notes of the member banks if properly secured. Commercial Banking and Credits 273 provided that the Federal Reserve bank does not obligate itself in advance to make any such renewal. An informal ruling of the Federal Reserve Board in connection with renewals is to the efifect that the Federal Reserve Board does not wish to prohibit the renewal of fifteen day notes but feels that renewals should be the exception rather than the rule. COMMERCIAL BANKING AND CREDITS REDISCOUNTS OF ACCEPTANCES, DRAFTS AND BILLS OF EXCHANGE WITH THE FEDERAL RESERVE BANKS SECTION IV COMMERCIAL BANKING AND CREDITS Rediscounts With Federal Reserve Banks of Acceptances, Notes AND Bills of Exchange General Statutory Provisions Rediscount of notes, drafts, bills of exchange, commercial, agriciil- tural and commodity paper. — Notes, drafts and bills of exchange may be discounted by member banks of the Federal Reserve System with Federal Reserve banks, governed by the following provisions : Upon the indorsement of any of its member banks, which shall be a waiver of demand, notice, and protest by such bank as to its own indorsement exclusively, any Federal Reserve bank may discount notes, drafts and bills of exchange arising out of actual commercial transactions ; that is, notes, drafts and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the pro- ceeds of which have been used, or are to be used for such purposes, the Federal Reserve Board to have the right to determine or define the character of the paper thus eligible for discount. Notes, drafts and bills of exchange secured by staple agricultural products, or other goods, wares or merchandise, are also to be considered as eligible for discount. Classes of ineligible paper. — Notes, drafts or bills covering merely investments or issued or drawn for the purpose of carrying on trading in stocks, bonds, or other investment securities, except bonds and notes of the government of the United States, are ineligible. Maturity of eligible paper. — Notes, drafts and bills admitted to dis- count must have a maturity at the time of discount of not more than ninety days, exclusive of days of grace. Notes, drafts and bills drawn or issued for agricultural purposes or i)ased on live stock and having a maturity not exceeding six months, exclusive of days of grace, may be discounted in an amount to be limited to a percentage of the assets 277 278 Bank and Trade Acceptances of the Federal Reserve bank to be ascertained and fixed by the Fed- eral Reserve Board. Amount rediscountable by one bank for any one interest. — The ag- gregate amount of such notes, drafts and bills bearing the signature or indorsement of any one borrower, whether a company, person, firm, or corporation, rediscountable for any one bank, shall at no time exceed ten per cent, of the unimpaired capital and surplus of the bank; but this restriction shall not apply to the discount of bills of exchange drawn in good faith against actually existing values. Bank acceptances eligible for rediscount. — Any Federal Reserve bank may discount acceptances of the kinds hereinafter described, which have a maturity at the time of discount of not more than three months' sight, exclusive of days of grace, and which are indorsed by at least one member bank. Such acceptances may: (i) Grow out of transactions involving the importation or exporta- tion of goods ; (2) Grow out of transactions involving the domestic shipment of goods, provided shipping documents conveying or securing title are attached at the time of acceptance ; (3) Must be secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title, covering readily marketable staples ; (4) Arise out of the drawing of drafts or bills of exchange issued for the purpose of furnishing dollar exchange. Rediscounts for member State banks. — No Federal Reserve bank is permitted to discount for any (member) State bank or trust company notes, drafts, or bills of exchange, of any one borrower who is liable for borrowed money to such State bank or trust company in an amount greater than ten per cent, of the capital and surplus of such State bank or trust company, but the discount of bills of exchange drawn against actually existing value and the discount of commercial or business paper actually owned by the person negotiating the same shall not be considered as borrowed money. Conditions attached to rediscounts by Federal Reserve banks. — Fed- eral Reserve banks, as a condition of the discount of notes, drafts and Commercial Banking and Credits 279 bills of exchange, for such State bank or trust company, shall require a certificate or guaranty to the effect that the borrower is not liable to such bank in excess of ten per cent, of the unimpaired capital and surplus of such bank, and will not be permitted to become liable in excess of this amount while such notes, drafts and bills of exchange are under discount with the Federal Reserve banks. Discounts for non-members. — No member bank is permitted to act as the medium or agent of a non-member bank in applying for or receiving discounts from a Federal Reserve bank, except by permis- sion of the Federal Reserve Board. Discounts and rediscounts subject to regulations of Federal Reserve Board. — The discount and rediscount and the purchase and sale by any Federal Reserve bank of any bills receivable and of domestic and foreign bills of exchange, and of acceptances authorized by the Fed- eral Reserve Act, are subject to such restrictions, limitations and reg- ulations as may be imposed by the Federal Reserve Board. Applications for rediscount; requirement of certificate of member bank. — All applications for the rediscount of notes, drafts, or bills of exchange must contain a certificate of the member bank, in form to be prescribed by the Federal Reserve bank, that, to the best of its knowledge and belief, such notes, drafts, or bills of exchange have been issued for one or more of the purposes governing eligibility as set forth in the regulations of the Federal Reserve Board. REDISCOUNT OF PROMISSORY NOTES Definition of promissory note. — A promissory note is defined as an unconditional promise, in writing, signed by the maker, to pay, in the United States, at a fixed or determ.inable future time, a sum certain in dollars to order or to bearer. CLASSES OF NOTES ELIGIBLE General Statutory Provisions Commercial paper; definition of eligible notes. — l",ligil)le notes are defined in the law as follows: Notes, drafts and bills of exchange 28o Bank and Trade Acceptances issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used or are to be used for such pur- poses. The Federal Reserve Board has the right to determine or define the character of the paper thus eligible for rediscount. Agricultural and commodity paper. — Notes, drafts and bills of ex- change secured by staple agricultural products, or other goods, wares, or merchandise, are eligible for rediscount. Paper based on United States obligations.— Notes, drafts, or bills issued or drawn for the purpose of carrying on trading in bonds and notes of the government of the United States are included in the classes of promissory notes eligible for rediscount. REGULATIONS OF THE FEDERAL RESERVE BOARD Relating to Eligible Classes of Promissory Notes Definition of commercial paper eligible for rediscount. — ^The Fed- eral Reserve Board, exercising its statutory right to define the char- acter of a note, draft, or bill of exchange eligible for rediscount at a Federal Reserve bank, has determined that it must be a note, draft, or bill of exchange, the proceeds of which have been used or are to be used in producing, purchasing, carrying or marketing goods, wares, or merchandise in one or more of the steps of the process of produc- tion, manufacture or distribution. The paper may be secured by the pledge of goods or collateral provided it is otherwise eligible. OPINIONS OF COUNSEL AND RULINGS Relating to Eligible Classes of Promissory Notes Loans to individuals. — Federal Reserve banks do not make loans directly to individuals, but rediscount the paper of member banks which include all national banks and such State banks which may have joined the Federal Reserve System. Notes Based on Production and Distribution of Goods Paper of waterworks company. — The ninety day paper of a water- works company, the proceeds of which have been used, or are to be Commercial Banking and Credits 281 used to provide funds for pay-roll, purchases of coal, etc., is eligible for rediscount by a Federal Reserve bank if the paper otherwise conforms to the law and the provisions of the Board's regulations. Notes of farmers. — Farmers' notes, the proceeds of which are to be used for tilling farms or for draining land already in use as farm land, should be classified as agricultural paper and are eligible for redis- count. Assignment of open accounts ineligible. — The assignment of an open account is not negotiable paper and is therefore not eligible for rediscount by a Federal Reserve bank. Discount of renewal notes. — In an informal ruling of the Federal Reserve Board, the following is mentioned in connection with the dis- count of renewal notes : Self-liquidating paper, even though the transaction which gives rise to it does not liquidate itself within the ninety day maturity, might be discounted even though it appears to be renewal paper. Banks should not enter into an agreement for a renewal, and care should be exercised in examining such paper, and the transactions which give rise to it, but mechanical rules should not be allowed to take the place of discriminating banking judgment. Secured notes ; eligibility tested by use of funds. — The eligibility of a note for rediscount is determined l)y the use of the funds derived from the original negotiation of the note. The collateral security of the note may indicate its use, but the form of collateral is otherwise immaterial. A note may, therefore, be secured by railroad stocks and bonds, Intt the proceeds might be used for agricultural, industrial or commercial purposes, in which event the note would be eligible for rediscount, although it would not be so if the proceeds were used to I)urchase or carry the railroad stocks and bonds. Notes secured by collateral. — Notes secured by collateral, the pro- ceeds of which have been used or are to be used for commercial pur- poses, and which otherwise comply with the regulations, are eligible for rediscount. The fact that commercial paper has the additional security of collateral in uo way affects its eligibility f(jr rediscount 282 Bank and Trade Acceptances Collateral of mortgages. — A note, draft, or bill of exchange, drawn for commercial purposes and otherwise eligible for rediscount is not rendered ineligible merely because it is secured by a mortgage on real estate. Paper secured by bills receivable. — The note of a manufacturer se- cured by his bills receivable is desirable paper, and is not debarred as a collateral trust note. Eligible security not sufHcient. — A note, even though secured by eligible paper, is not itself eligible for rediscount, unless issued for an agricultural, commercial or industrial purpose. Offerings considered upon their merits; rediscounts for insolvent banks. — A Federal Reserve bank is not obliged to give assurance to a receiver of an insolvent member bank that it will upon the reopening of the insolvent bank rediscount its eligible paper freely, without requiring the indorsement of directors or other additional sescurity. Notes secured by food products. — Paper secured by staple perish- able food products, such as butter, cheese, eggs, poultry, frozen fish, etc., carried for reasonable periods, in cold storage, on negotiable warehouse receipts, is eligible, if offered with the indorsement of a member bank at the usual rate for ninety day commercial paper. Notes secured by pig-iron. — The note of a furnace company, secured by pig-iron, manufactured by the company on contract for delivery, is eligible for rediscount, but the Federal Reserve bank upon being offered such paper may scrutinize each case according to its merits. Notes based on United States obligations. — A Federal Reserve bank may discount a note, draft, or bill of exchange, indorsed by a member bank, which is issued or drawn for the purpose of carrying on trading in bonds or notes of the United States. The statement of law that the definition of eligible paper shall not include notes, drafts or bills of exchange drawn for the purpose of carrying on trading in stocks, bonds or other government securities, except bonds and notes of the Commercial Banking and Credits 283 government of the United States, is equivalent to an affirmative decla- ration of the eligibility of such notes based on United States obliga- tions. Any member bank which has loaned money to any of its customers for the purpose of carrying on trading in bonds or notes of the United States may rediscount with its Federal Reserve bank the bill or note of its customer, provided such bill or note conforms to the following conditions governing eligibility : (i) Has a maturity at the time of discount of not more than ninety days, exclusive of days of grace ; (2) Has the indorsement of the member bank. Such bill or note, however, need not necessarily be secured and need not be drawn for a commercial purpose other than for the purpose of carrying on trading in notes or bonds of the United States. Relation of maturity to eligibility. — A member bank, acting through another member bank, may obtain the discount of its paper, secured by government bonds, for a period as long as ninety days, although a member bank acting alone may not tender its collateral note to the Federal Reserve bank which runs for more than fifteen days. A country bank which has regular dealings with a large bank in a city may send its note secured by government bonds to that bank, and the Board would regard the note as eligible for rediscount by the city bank. Notes of non-member banks. — If the proceeds of a note have been used or are to be used to carry on trading in United States obligations, the note, if acquired in good faith, should be eligible for rediscount with the indorsement of the member bank, whether it is executed by a member bank or by a non-member bank. CLASSES OF NOTES INELIGIBLE General Statutory Trovisions Security paper ineligible. — Eligible pai)cr shall not include- notes, drafts or bills covering merely investments or issued or drawn for the purpose of carrying on trading in stocks, bonds or other investment securities, except bonds and notes of the United .States. 284 Bank and Trade Acceptances REGULATIONS OF FEDERAL RESERVE BOARD Relating to Ineligible Classes of Promissory Notes Notes for permanent, fixed or speculative investments. — A note, draft, or bill of exchange, the proceeds of which have been used or are to be used for permanent or fixed investments of any kind, such as lands, buildings, or machinery, are ineligible. The paper must also not be a note, draft, or bill of exchange, the proceeds of which have been used or are to be used for investments of a purely speculative character. OPINIONS OF COUNSEL AND RULINGS Relating to Ineligible Classes of Promissory Notes Renewals and Extensions Discount of renewal notes. — Banks should not enter into an agree- ment for renewal. Banking judgment is necessary in determining the merits of each renewal. Those providing working capital or to finance fixed investments are not eligible for rediscount. Extension of time. — A note or draft containing a provision for an extension of time should not be approved for general use by the Fed- eral Reserve Board. Financial paper; notes to replace funds withdravsm ineligible. — A note executed by one bank and discounted by another, the proceeds of which were used to replace funds withdrawn by customers to purchase liberty bonds is not eligible for rediscount by a Federal Reserve bank, since the proceeds were not used for an agricultural, industrial or commercial purpose or for the purchase of notes or bonds of the United States. Paper secured by War Savings Stamps. — Notes, drafts and bills of exchange which are secured by War Savings Stamps are ineligible for rediscount with a Federal Reserve bank. It is suggested bv counsel that War Savings Stamps are not bonds or notes of the Unites States, but in effect only receipts for payment on account of non-negotiable evidences of indebtedness. Commercial Banking and Credits 285 Notes of finance companies. — The note of a finance or credit com- pany which is either drawn directly or indirectly to finance some industrial or commercial concern in the transaction of its business is not eligible for rediscount, even though it may be secured by paper which is itself eligible for rediscount. Notes of acceptance houses or brokers. — The note of an acceptance house or broker, secured by acceptances eligible for rediscount at a Federal Reserve bank, is not eligible for rediscount. Such note of the acceptance house or broker cannot be said to have been used for an industrial, agricultural or commercial purpose, since the business of such acceptance house or broker is not such as to come within any of these classifications. The fact that the note is secured by eligible paper is immaterial if the proceeds are not used for one of the purposes named. Collateral trust notes undesirable. — Collateral trust notes are con- sidered by the Board as not arising out of commercial transactions, and Federal Reserve banks are, therefore, directed not to accept such for rediscount. Collateral of bills receivable. — The note of a manufacturer, secured by his bills receivable, is desirable paper, and should not be debarred as a collateral trust note. However, if such collateral of bills receiv- able is issued for the purpose of carrying collateral for a speculative purpose or collateral in the nature of stocks and bonds other than the securities of the United States, the note would be ineHgil)le for redis- count. Bills Payable With Collection Charges Exchange and collection charges distinguished. — A hill made pay- able with collection charges is not a negotiable instrument, though the negotiable instruments law provides that an instrument payable with exchange does not lose its negotiability. Exchange is usually ascertainable in advance while collection charges are not so ascer- tainable. Charges before and after maturity. — A bill containing a provision for payment of the cost of collection and attorney's fees if it is dis- 286 Bank and Trade Acceptances honored at maturity is a valid negotiable instrument. It must be drawn so as to show that no collection charges are to be included unless the bill is dishonored at maturity. EVIDENCE OF ELIGIBILITY AND REQUIREMENT OF STATEMENTS REGULATIONS OF THE FEDERAL RESERVE BOARD Evidence of eligibility. — A Federal Reserve bank must be satisfied by reference to the note or otherwise that it is eligible for rediscount. Compliance of a note may be evidenced by a statement of the borrower showing a reasonable excess of quick assets over current liabilities. The member bank shall certify in its application whether the note oflfered for rediscount has been discounted for a depositor or for another member bank, or whether it has been purchased for a non- depositor. It must also certify whether a financial statement of the borrower is on file. Financial statements. — Such financial statements must be on file with respect to all notes oflFered for rediscount, which have been pur- chased from sources other than a depositor or a member bank. With respect to any other note offered for rediscount, if no statement is on file, a Federal Reserve bank can use its discretion in taking the steps necessary to satisfy itself as to eligibility. It is authorized also to waive the requirement of a statement with respect to any note dis- counted by a member bank for a depositor or another member bank, in accordance with the following: (i) If it is secured by a warehouse, terminal or other similar receipt covering goods in storage ; (2) If the aggregate of obligations of the borrower rediscounted and offered for rediscount at the Federal Reserve bank is less than a sum equal to ten per cent, of the paid in capital of the member bank and does not exceed Five Thousand Dollars. Commercial Banking and Credits 287 OPINIONS AND RULINGS Relating to Evidence of Eligibility and Requirement of Statements Paper of cotton mills. — Authorization is given to banks to discount paper of cotton mills indorsed by member banks where general condi' tions are satisfactory, and where the statement of the cotton mill indi- cates that the plant is not mortgaged and that the deficiency between capital and plant account does not amount to more than five dollars per spindle. Unmined minerals are not regarded as quick assets ; standing timber not regarded as quick assets. — The Federal Reserve Board regards it as an unsafe policy for Federal Reserve banks to treat timber stand- ing upon tracts of land as quick assets, similar to manufactured goods in the hands of the manufacturer or jobber. The same applies to unmined minerals. MATURITY OF NOTES ELIGIBLE FOR REDISCOUNT General Statutory Provisions Commercial, agricultural and live stock paper. — Notes, drafts, and bills admitted to discount under terms of this paragraph must have a maturity at the time of discount of not more than ninety days, exclu- sive of days of grace, with the exception of notes, drafts and bills drawn or issued for agricultural purposes or based on live stock, which may have a maturity of not exceeding six months, exclusive of days of grace. These may be discounted in an amount to be limited to a percentage of the assets of the Federal Reserve bank to be ascer- tained and fixed by the Federal Reserve Board. OPINIONS OF COUNSEL AND RULINGS Relating to Maturity of Promis.sory Notes Eligible for Rediscount Notes payable on or before a certain date. — A bill payable "on or before" a certain date is negotiable j)aper, and, if otherwise in con- formity with the provisions of law and the Federal Reserve bank is eligible for discount with a Federal Reserve bank. 288 Bank and Trade Acceptances Demand notes not eligible. — A demand note or bill is not eligible since it is not in terms payable within the prescribed ninety days, but may, at the option of the holder, not be presented for payment until after that time. However, if the bill were altered so as to read "on or before days from date, pay to the order of ourselves," etc., it would come within the terms of the law and would thus he made eligible for rediscount. Notes payable before a certain date. — A note made payable "on demand, and if no demand is made, then on ," is eligible for rediscount with a Federal Reserve bank, provided that the date to be filled in is not more than ninety days from the date of discount, and provided further it conforms to the other provisions of law and the regulations of the Board. Extension of time on notes or drafts. — A note or draft containing a provision for an extension of time should not be approved for general use by the Federal Reserve Board. Direct loans and discounts distinguished. — A member bank may obtain indirectly, acting through another member bank, the discount of its paper secured by government bonds for a period as long as ninety days, although a member bank acting alone may not tender its collateral to the Federal Reserve bank, which runs for more than fifteen days. It may be proper in this connection to consider questions of fact — whether the two banks exchange courtesies merely for the purpose of having their notes discounted for ninety days instead of fifteen days ; but in case a country bank which has its regular dealings with a large bank in a city sends its notes secured by government bonds to that bank, the Board would regard the note as eligible for rediscount by the city bank. REGULATIONS OF THE FEDERAL RESERVE BOARD Relating to Maturity of Promissory Notes Eligible for Rediscount Maturity of notes, drafts, bills of exchange and agricultural paper. — Any Federal Reserve bank may discount for any of its member banks any note, draft, or bill of exchange, provided it has a maturity at the Commercial Banking and Credits 289 time of discount of not more than ninety days, exclusive of days of grace ; but if drawn or issued for agricultural purposes or based on live stock, it may have a maturity at the time of discount of not more than six months, exclusive of days of grace. AMOUNT OF PAPER OF ONE INTEREST REDISCOUNTABLE FOR ONE MEMBER BANK General Statutory Provisions Limitation of amount; exception. — The aggregate of such notes, drafts and bills of exchange, bearing the signature or indorsement of any one borrower, whether a person, company, firm, or corporation, rediscount for any one bank, shall at not time exceed ten percentum of the unimpaired capital and surplus of said bank ; but this restric- tion shall not apply to the discount of bills of exchange drawn in good faith against actually existing values. Limitation of rediscounts for member State banks. — No Federal Reserve bank shall be permitted to discount for any member State bank or trust company, notes, drafts, or bills of exchange of any one borrower who is liable for borrowed money to such State bank or trust company in an amount greater than ten percentum of the capital and surplus of such State bank or trust company ; but the discount of bills of exchange drawn against actually existing value and the dis- count of commercial or business paper actually owned by the person negotiating the same shall not be considered as borrowed money. Conditions governing discount of notes, drafts and bills of exchange for State banks or trust companies. — The Federal Reserve hank, as a condition of the discount of notes, drafts or bills of exchange for such State bank or trust company shall require a certificate or guaranty to the effect that the borrower is not liable to such bank in excess of ten percentum of the unimpaired capital and surplus of said i)ank. and will not be permitted to become liable in excess of this amount while such notes, drafts, or bills of exchange are under discount with tht- I-'cclcral Reserve bank. 290 Bank and Trade Acceptances REGULATIONS OF THE FEDERAL RESERVE BOARD In Connection With Amount of Paper of One Interest Rediscount- able FOR One Member Bank Ten per cent, limit and exceptions. — The aggregate of notes, drafts and bills bearing the signature or indorsement of any one borrower, whether a person, company, firm, or corporation, rediscountable for any one member bank, is not permitted at any time to exceed ten per cent, of the unimpaired capital and surplus of such bank; but this restriction does not apply to the discount of bills of exchange in good faith against actually existing value. OPINIONS OF COUNSEL AND RULINGS In Connection With Amount of Paper of One Interest Rediscount- able for One Member Bank Limitation of amount rediscountable. — A Federal Reserve bank is not permitted to rediscount the paper of a customer of a member State bank if the customer is indebted to such member bank in an amount in excess of ten per cent, of the capital and surplus of said bank. Discount of paper for one maker or indorser. — If any particular paper presented by a member bank to a Federal Reserve bank for rediscount, singly or added to the paper of the same makers or indors- ers, which the Federal Reserve bank has already rediscounted for said member bank, amounts to a total of more than ten per cent, of the unimpaired capital and surplus of that bank, the Federal Reserve bank has no authority for such rediscount. Not applicable to rediscoimting bank. — The limitations on the redis- count of paper bearing the signature or indorsement of any one bor- rower should not be held to refer to the indorsement of a non-member bank on paper rediscounted with a member bank. Paper of cotton broker. — An opinion has been asked as to whether a cotton broker who was a depositor of a bank and financed cotton for Commercial Banking and Credits 291 various mills by giving- to the bank his note secured by warehouse receipts of the mills, indorsed in blank, for cotton stored in his name and properly insured, but sold to the mill for a specific amount to be paid at a specific time as per sales note attached — whether such loans taken from one broker in excess of ten per cent, of the capital and surplus of the bank would be an excess loan under the Federal Reserve Act, if the financing for each individual mill of the accepted sales note held of said mill were not in excess of ten per cent. It is held that the transaction in form is not merely a discount of single name negotiable paper secured by the cotton. Such notes would clearly come within the provisions of Section 5200 of the Revised Statutes (For Sec- tion 5200, see "Investment in Acceptances by Member Banks" in Part I, "Bank Acceptances"). No Federal Reserve bank could redis- count such notes bearing the name of one broker for an aggregate amount in excess of ten per cent, of the capital and surplus of the member bank. Limitation of Amount of Commercial or Business Paper Redis- COUNTABLE AND ItS RELATION TO SECTION 5200 OF THE Revised Statutes Commercial or business paper. — While a member bank may acquire commercial or business paper from the same person in excess of ten per cent, of its unimpaired capital and surplus, its Federal Reserve bank cannot rediscount such paper bearing the signature or indorse- ment of the same person in excess of that amount. It should be noted that Section 13 of the Federal Reserve Act does not amend Section 5200 of the U. S. Revised Statutes. (For text of U. S. Revised Statutes, Section 5200, see "Investment in Acceptances by Member Banks," in Part I, on "Bank Acceptances"). Rediscounted paper not included in aggregate amount. — A note or bill rediscounted in good faith by a member bank which is no longer owned or held by the bank need not be included as a liability of the maker to the bank. Notes or bills rediscounted under an agreement to repurchase, or which are merely credited to the account of the bank oflFering them for rediscount are subject to the limitations of Section 5200. (For text of U. S. Revised Statutes, Section 5200, see "Invest- ment in Acceptances by Member Banks"). 292 Bank and Trade Acceptances AGGREGATE AMOUNT REDISCOUNTABLE FOR ONE BANK General Statutory Provisions Indebtedness of national bank. — No national banking association shall at any time be indebted, or in any way liable, in an amount exceeding the amount of its capital stock at such time actually paid in and remaining undiminished by losses or otherwise, except on account of liabilities incurred under the provisions of the Federal Reserve Act. Rediscount subject to regulations of Federal Reserve Board. — The discount and rediscount and the purchase and sale by any Federal Reserve bank of any bills receivable and of domestic and foreign bills of exchange and of acceptances are subject to such restrictions, limita- tions, and regulations as may be imposed by the Federal Reserve Board. OPINIONS OF COUNSEL AND RULINGS Relating to Aggregate Amount of Promissory Notes Rediscount- able FOR One Bank No limitation by law of commercial paper rediscoimtable. — The law places no limitation upon the amount of commercial paper which a member bank may rediscount with a Federal Reserve bank, but leaves this to the judgment of the officers of the Federal Reserve bank. Discretion of Federal Reserve bank. — A national bank may not bor- row as bills payable in excess of its capital stock, according to Section 5202 of the Revised Statutes, but under the Federal Reserve Act, it may rediscount actual items of paper in its possession to any amount in the discretion of the Federal Reserve bank in its district. INDORSEMENT OF MEMBER BANKS In Connection With Rediscount of Promissory Notes General Statutory Provisions Indorsement. — Any Federal Reserve bank may discount notes, drafts, and bills of exchange upon the indorsement of any of its mem- Commercial Banking and Credits 293 ber banks, which shall be deemed a waiver of demand, notice and pro- test by such bank as to its own indorsement exclusively. OPINIONS OF COUNSEL AND RULINGS In Connection With Indorsement of Member Banks Indorsement as waiver. — A simple written indorsement will be regarded as satisfactory and as coming within the terms of the law. Effect of not bearing "without recourse." — If a note is otherwise eligible for rediscount, the fact that it bears a "without recourse" indorsement of a non-member bank will not aflfect its eligibility. REDISCOUNT FOR NON-MEMBER BANK In Connection With Promissory Notes General Statutory Provisions Rediscounts for non-members. — No member bank shall act as the medium or agent of a non-member bank in applying for or receiving discounts from a Federal Reserve bank except by permission of the Federal Reserve Board. OPINIONS OF COUNSEL AND RULINGS Relating to Rediscount of Promissory Notes for Non-Member Banks Rediscount of paper acquired from non-member banks. — It would be necessary in each case for the officers of the Federal Reserve bank to determine whether or not the proceeds of such discounts are to be used for the purpose of making a loan to a non-member bank. If the money thus borrowed is to be relent to a non-member bank, redis- count should not be accepted without the permission of the Federal Reserve Board. If, on the other hand, a member bank had in good faith acquired from a non-member bank by rediscount, notes which arc 294 Bank and Trade Acceptances eligrible under the regulations of the Board for rediscount with a Fed- eral Reserve bank, and such notes were held as part of the assets of the member bank, there would seem to be no objection to the Federal Reserve bank accepting such rediscounts, provided the officers are satisfied that the member bank did not extend accommodation to the non-member bank with a view of rediscounting notes so acquired with the Federal Reserve bank. This is one of the cases which must be left very largely to the judgment and discretion of the officers of the Federal Reserve bank, and the determination must be reached by them on the facts of the case. Rediscount of paper indorsed by non-member bank. — The limita- tions on the rediscount of paper bearing the signature or indorsement of any one borrower should not be held to refer to the indorsement of a non-member bank on paper rediscounted with a member bank. It is true that in such case the non-member bank is contingently liable if the paper is not paid at maturity, but the Board is inclined to the view that this language refers to paper bearing the signature or indorsement of borrowers or customers of the member banks and not to the indorsement of other banks. A non-member bank could not, of course, obtain indirect accommodations from the Federal Reserve bank through the medium or agency of a member bank except with the permission of the Federal Reserve Board. But, if a member bank had acquired eligible paper in due course by redis- count from a non-member bank, the member bank should hardly be precluded from rediscounting this paper with the Federal Reserve bank because it bears the indorsement of the non-member bank. REDISCOUNT OF DRAFTS AND TRADE ACCEPTANCES Regulations of Federal Reserve Board Definition of draft or bill of exchange. — A draft or bill of exchange is an unconditional order in writing, addressed by one person to another, other than a banker, signed by the person giving it, requiring the person to whom it is addressed to pay, in the United States, at a fixed or determinable future time, a sum certain in dollars to the order of a specified person. Commercial Banking and Credits 295 OPINIONS OF COUNSEL AND RULINGS Relating to the Rediscount of Drafts and Trade Acceptances Extension of time for notes or drafts. — A note or draft containing a provision for an extension of time should not be approved for general use by the Federal Reserve Board. Presentment of bills for acceptance. — The drawer and indorser of a bill of exchange made payable on the date specified in the bill are not discharged by a failure to present for acceptance, unless the bill expressly provides that it must be presented for that purpose, or unless it is payable elsewhere than at the residence or place of business of the drawee. Acceptor not affected by waiver. — The acceptor of a bill of exchange is the principal debtor. The law requires that notice of demand and protest be given to parties secondarily liable in case of dishonor. This right to receive notice is a personal one which may be waived by the parties entitled thereto, that is, the drawer and indorser; but such waiver has no affect on the acceptor or principal debtor. NEGOTIABILITY OF DRAFTS AND TRADE ACCEPTANCES Effect of waivers. — The negotiability of a bill of exchange is not affected by provisions which waive demand, notice and protest ; which waive homestead exemption rights ; and which provide for the costs of collection and attorney's fees. Drafts payable on condition. — A draft made "payable on arrival of car" is non-negotiable, not being payable at a determinable future time. Drafts payable with interest. — A provision in a draft or bill of exchange that it is j>ayable "with interest at the rate of % per annum after maturity, if payment is delayed," does not affect the negotiability of an instrument. Charges before and after maturity. — A bill drawn for a fixed sum "with collection charges" is not a negotiable instrument unless it is 296 Bank and Trade Acceptances so drawn as to show that no collection charges are to be included unless the bill is dishonored at maturity. A bill containing a provision for payment of the costs of collection of attorney's fees if it is dis- honored at maturity is a valid negotiable instrument. Exchange and collection charges. — A bill made payable with "col- lection charges" is not a negotiable instrument, though the negotiable instruments law provides that an instrument payable "with exchange" does not lose its negotiability. It is suggested by counsel that the amount of exchange is usually ascertainable in advance while col- lection charges are not so ascertainable. Drafts payable to order of drawee. — A bill made payable to the order of the drawee is not negotiable until the drawee as payee has indorsed it. When it has been accepted and indorsed by the payee it is a valid negotiable instrument in the hands of a third party, and the drawer is not released, since the terms of his order have been specifi- cally complied with. SECTION V TRADE ACCEPTANCES Regulations of the Feder.\l Reserve Board Definition. — A trade acceptance is defined in simple terms as a draft or bill of exchange drawn by the seller on the purchaser of goods sold, and accepted by such purchaser. OPINIONS OF COUNSEL AND RULINGS Relating to Trade Acceptances Acceptance by drawee. — A draft to be eligible as a trade acceptance must be accepted by the drawee and not by anyone else. Place of payment of acceptance. — An acceptance to pay at a particu- lar place different from the residence of the acceptor is a general acceptance, unless it expressly states that the bill is to be paid there and not elsewhere, and does not render the bill non-negotiable. Discount for prepayment. — A trade acceptance providing for a fixed discount if paid at a certain time before maturity should not be approved for general use by the Federal Reserve Board. Discount for payment at maturity. — A trade acceptance which con- sists of an order to pay a certain amount which is the amount of the debt, minus a discount for prompt payment at maturity, or if not paid at maturity to pay a greater amount, which is the amount of the dclit without any discount, is an order to pay a certain sum and is nego- tiable. ELIGIBLE DRAFTS AND TRADE ACCEPTANCES General Statutory Provisions Definition of eligible paper. — Eligible paper is defined in the law as follows: Notes, drafts and bills of exchange issued or drawn for 297 298 Bank and Trade Acceptances agricultural, industrial or commercial purposes, or the proceeds of which have been used or are to be used for such purposes, the Federal Reserve Board to have the right to determine or define the character of the paper thus eligible for discount. Notes, drafts and bills of exchange, secured by staple agricultural products, or other goods, wares or merchandise, are eligible, as well as are notes, drafts or bills drawn for the purpose of carrying on trading in bonds or notes of the Government of the United States. REGULATIONS OF FEDERAL RESERVE BOARD Relating to Eligible Drafts and Trade Acceptances Conditions governing eligibility. — ^The Federal Reserve Board has determined that in order for a note, draft, or bill of exchange to be eligible for rediscount, the proceeds must have been used or are to be used in producing, purchasing, carrying or marketing goods, wares and merchandise in one or more of the steps of the process of manu- facturing, producing or distributing. OPINIONS OF COUNSEL AND RULINGS Relating to Eligible Drafts and Trade Acceptances Bills based on retail transactions. — A bill of exchange drawn by the seller of goods and accepted by the purchaser of those goods is a trade acceptance, according to the informal ruling of the Federal Reserve Board, regardless of whether or not the purchaser intends to resell the goods or to use them for his own purpose. It is, therefore, made possible for a retail dealer to finance the sale of his goods to a retail customer by means of the trade acceptance. Bills based on sale and delivery of gas. — An acceptance drawn by a gas producing company or a gas distributing company and accepted by the latter in payment for gas sold and delivered is a trade accept- ance eligible for rediscount by a Federal Reserve bank. Bills based on installment plan sales. — The Board has ruled that if the purchaser is willing to accept a draft in advance of the delivery of Commercial Banking and Credits 299 the goods, there will seem to be no reason why such an acceptance should not be treated on the same basis as a bill drawn and accepted after delivery of such goods. The above has been ruled in connection with the sale of coffee mills, etc., on the installment plan. Drafts based on electrical installation. — Drafts drawn for the pur- chase price of electrical goods which include the cost of installation, may be treated as trade acceptances when such drafts are accepted by the purchaser. Acceptances in liquidation of open account. — A bill drawn by a retail dealer on his retail customer to finance the sale of goods to that customer is a trade acceptance even if it is drawn after the purchaser has failed to remit promptly on an open account. The Board has expressed its opinion several times that the attempt to use a trade acceptance in this manner as a means of liquidating an otherwise slow account would involve considerable danger to the primary pur- poses of the trade acceptance movement and would subordinate the trade acceptance to the open account method, by suggesting it as a last resort for bad accounts. Trade acceptances of this character should probably be considered eligible as a matter of law. Nevertheless, mem- ber banks and Federal Reserve banks may discriminate against them, and should be encouraged to do so as far as possible. Acceptances of sales corporations. — A draft drawn by a lumber cor- poration upon a sales corporation, which it and a number of other concerns have organized, will, when accepted, become a trade accept- ance, even though the selling corporation is a stockholder of the sales corporation, provided the latter is organized in good faith, and not merely to act as agent for the purpose of evading the law. Acceptances based on advertising space. — A draft or bill of exchange drawn by the seller on the purchaser of advertising space and accepted by such purchaser, is a trade acceptance. A draft or bill of exchange drawn by a publisher or other advertising agency on the purchaser of advertising space, and accepted by such i)urchaser, shall be considered a trade acceptance, provided the advertisement on wliicli the draft or bill is based, is for the purpose of promoting or facilitating the pro- duction, manufacture, distribution, or sale of goods, whether iner- 300 Bank and Trade Acceptances chandise or agricultural products, including- live stock, and provided, further, that such advertisement is not illegal and is not for the pur- pose of promoting or facilitating any transaction which is prohibited by the laws of the State in which it is to be consummated. These are the conditions upon which drafts drawn against advertising space sold will be ruled trade acceptances. Acceptances based on foreign transactions ; imports. — ^Trade accept- ances originating through importations from foreign countries, which are indorsed by banks or bankers may be considered as trade accept- ances, and may be taken within the range of the discount rates for bankers' acceptances. Acceptances based on foreign transactions; exports, — Bills drawn for the purpose of providing funds for the purchase and export of cross ties and lumber are eligible for rediscount if properly indorsed and otherwise conforming to the regulation of the Federal Reserve Board. The above has been ruled in connection with exports to Cuba. INELIGIBLE DRAFTS AND TRADE ACCEPTANCES Gener;\l Statutory Provisioxs Security paper ineligible. — Notes, drafts or bills covering merely investments or issued or drawn for the purpose of carrying on trading in stocks, bonds or other investment securities, except bonds or notes of the United States Government are ineligible for rediscount. REGULATIONS OF THE FEDERAL RESERVE BOARD Relating to Ineligible Drafts and Trade Acceptances Notes for permanent, fixed or speculative investments, — The paper must not be a note, draft or bill of exchange, the proceeds of which have been used or are to be used for permanent or fixed investments of any kind, such as land, buildings or machinery. The paper must not be a note, draft or bill of exchange, the proceeds of which have been used or are to be used for investments of a purely speculative character. Commercial Banking and Credits 301 OPINIONS OF COUNSEL AND RULINGS Relating to Ineligible Drafts and Trade Acceptances Acceptances based on future purchases. — A bill, in order to be a trade acceptance, must arise out of a purchase of goods, and unless that purchase is either consummated or actually contracted for at the time the bill is drawn, it is doubtful whether it can properly be said that the obligation arises out of a purchase of goods. Drafts in payment of insurance premiums. — A draft drawn by a casualty company against the policy holder for premiums could hardly be said to be a draft by the seller on the purchaser of goods sold and would not in the opinion of the Board come within the Board's present definition of a trade acceptance. Drafts drawn to finance capital requirements ineligible. — The Board conceives the trade acceptance as an instrument which carries upon its face the evidence of the commercial character of the transaction which gave it birth. The finance paper of the corporation issued against drafts drawn by it on dealers and placed in trust to secure such paper issued by it in the shape of notes or certificates, gives no indication whatever as to the nature of the security, which may or may not be eligible paper. The corporation by issuing notes of this character is really raising money for capital requirements for sim- ilar transactions in the future, and the whole plan is in essence a finance operation rather than a commercial transaction. EVIDENCE OF ELIGIBILITY REGULATIONS OF THE FEDERAL RESERVE BOARD Character of evidence. — A I-'ederal Reserve bank may take such steps as it deems necessary to satisfy itself as to the eligibility of the draft or bill ofTered for rediscount, unless it presents prima facie evi- dence thereof, or bears a stamp or certificate affixed by the acceptor or drawer showing that it is a trade acceptance. 302 Bank and Trade Acceptances OPINIONS AND RULINGS Relating to Evidence of Eligibility Effect of stamp "trade acceptance." — It has been held several times that a bill stamped a "trade acceptance" by a land company, and signed by such party as "acceptor" does not in itself make it a trade acceptance. MATURITY General Statutory Provisions Commercial, agricultural or live stock paper. — Notes, drafts or bills admitted to rediscount must have a maturity at the time of not more than ninety days, exclusive of days of grace, provided that such notes, drafts or bills drawn or issued for agricultural purposes, or based on live stock, and having a maturity not exceeding six months, exclusive of days of grace, may be discounted in an amount limited to a percentage of the assets of the Federal Reserve bank, to be ascertained and fixed by the Federal Reserve Board. REGULATIONS OF THE FEDERAL RESERVE BOARD Relating to Maturity Period of maturity; requirements. — The draft or trade acceptance must have a maturity at the time of discount of not more than ninety days, exclusive of days of grace, but if drawn or issued for agricultural purposes or based on live stock, it may have a maturity at the time of discount of not more than six months, exclusive of days of grace. OPINIONS OF COUNSEL AND RULINGS Relating to Maturity Drafts payable on condition. — A draft made "payable on arrival of car" is non-negotiable, not being payable at a determinable future time and is, therefore, ineligible for rediscount by a Federal Reserve bank. Commercial Banking and Credits 303 Drafts payable "on or before" a certain date. — Drafts payable "ninety days from date or before on five days after demand (that is, on five days' notice) by the holder hereof" are negotiable and eligible for discount with a Federal Reserve bank. Demand drafts. — A demand note or bill is not eligible since it is not in terms payable within the prescribed ninety days, but. at the option of the holder, may not be presented for payment until after that time. If the bill were altered so as to read "on or before days from date pay to the order of ourselves," etc., it would come within the terms of the law and would be eligible for rediscount. Extension of time. — A note or draft containing a provision for an extension of time should not be approved for general use by the Fed- eral Reserve Board. AMOUNT OF PAPER OF ONE INTEREST REDISCOUNTABLE FOR ONE MEMBER BANK General Statutory Provisions Limitation as to amount and acceptance. — The aggregate of such notes, drafts and bills bearing the signature or indorsement of any one borrower, whether a person, company, firm, or corporation, redis- counted for any one bank, shall at no time exceed ten percentum of the unimpaired capital and surplus of said bank ; but this restriction shall not apply to the rediscount of bills of exchange drawn in good faith against actually existing items. REGULATIONS OF FEDERAL RESERVE BOARD On the Rediscount of Drafts and Trade Acceptances Limitation as to amount and exception. — The aggrognte of notes, drafts and bills bearing the signature or indorsement of any one bor- rower, whether a person, company, firm, or corporation, rcdiscountcd for any one member bank, shall at no time exceed ten per cent, of the unimpaired capital and surplus of such bank: but this restriction shall not apply to the discount of bills of exchange drawn 111 good faith against actually existing values. 304 Bank and Trade Acceptances OPINIONS OF COUNSEL AND RULINGS On the Rediscount of Drafts and Trade Acceptances Drafts discounted before acceptance.— A bill of exchange discounted before acceptance may be said to be drawn against actually existing values, when and only when it is accompanied by shipping documents, warehouse receipts or other papers securing title to the goods sold. Trade acceptances. — An accepted bill of exchange, unaccompanied by shipping documents or other such paper may be considered as drawn against actually existing values if drawn against the drawee at the time of, or within a reasonable time after, the shipment or deliv- ery of the goods sold. In this latter case, there must be reasonable grounds to believe that the goods are in existence in the hands of the drawee either in their original form or in the shape of the proceeds of their sale. Trade acceptances for long standing open accounts. — A bill drawn for a balance due on open accounts of long standing, which is accepted by the debtor, might constitute a trade acceptance, but in order for it to be excepted from the limitations imposed by the Federal Reserve Act as a bill of exchange drawn against actually existing values, it must have been drawn contemporaneously with or withm such a rea- sonable time after the shipment of the goods, as to justify the assump- tion that the goods are in the hands of the drawee in their original form or in the form of the proceeds of sale. Qualified acceptances. — A bill of exchange drawn payable "at sight" and accepted payable in three months is a qualified or condi- tional acceptance, and the maker and prior indorsers are released. The instrument in effect becomes the promissory note of the acceptor and would not come within the exception to Section 5200 of the Revised Statutes, as a "bill of exchange" drawn in good faith against actually existing value. Evidence of actually existing value. — As evidence of this fact, the Federal Reserve bank might reasonably require such trade accept- ances as are offered "as bills of exchange drawn against actually exist- Commercial Banking and Credits 305 ing values" to show the date of invoice so that it may be determined whether or not the account is one of long standing. (For further reference to the subject of rediscount of drafts and trade acceptances, see opinions and rulings relative to promissory notes ; also rediscount of promissory notes affecting the aggregate amount rediscountable for one bank; indorsement of member banks; and rediscounts for non- member banks). REDISCOUNTS BY FEDERAL RESERVE BANKS OF SIX MONTHS' AGRICULTURAL PAPER Regulations of the Federal Reserve Board Six months' agricultural paper defined; includes live stock. — Six months' agricultural paper is defined as a note, draft, bill of exchange, or trade acceptance, drawn or issued for agricultural purposes, or based on live stock; that is, a note, draft, bill of exchange, or trade acceptance, the proceeds of which have been used, or are to be used, for agricultural purposes, including the breeding, raising, fattening, or marketing of live stock, and which has a maturity at the time of discount of not more than six months, exclusive of days of grace. OPINIONS OF COUNSEL AND RULINGS Relating to the Rediscount of Six Months' Agricultural Paper What live stock includes. — The term "live stock" is held to include not only beef cattle, but also horses and mules. Notes of cattle dealers merely mercantile. — Notes made by mule and cattle dealers are mercantile rather than agricultural paper. Notes of implement dealers not agricultural paper. — A note made by a dealer in agricultural implements is not agricultural paper. Agricultural products or implements. — The purchase or sale of an agricultural product, or of implements or other commodities used in agriculture, constitutes a commercial transaction. A note made by a merchant, the proceeds of which are used to purchase seed, to be later retailed or sold, cannot be treated as given for agricultural pur- poses and cannot be discounted by a Federal Reserve bank, if it has a maturity at time of discount of more than ninety days. Notes or bills of packing companies. — The bill or note of a packing company, the proceeds of which are used for the purchase of live 306 Commercial Banking and Credits 307 stock which is slaughtered upon purchase, is not "based on live stock" and is, therefore, not eligible for rediscount if it has a maturity in excess of ninety days. ELIGIBLE AGRICULTURAL PAPER General Statutory Provisions Agricultural and live stock paper. — Notes, drafts and bills drawn or issued for agricultural purposes, or based on live stock, and having a maturity not exceeding six months, exclusive of days of grace, may be rediscounted in an amount to be limited to a percentage of the assets of the Federal Reserve bank, to be ascertained and fixed by the Fed- eral Reserve Board. REGULATIONS OF THE FEDERAL RESERVE BOARD Relating to Eligible Agricultural Paper Conditions governing eligibility. — To be eligible for rediscount, six months' agricultural paper, whether a note, draft, bill of exchange, or trade acceptance, must comply with the statutory provisions, regu- lations of the Federal Reserve Board, opinions of counsel and rulings reviewed in the subject of "Classes of Promissory Notes I'^ligiblc for Rediscount," which are the same in the case of the rediscount of drafts and trade acceptances. OPINIONS OF COUNSEL AND RULINGS Relating to Eligible Agricultural Paper Cattle mortgages. — Mortgages on cattle arc not re(|uircd, and tlir question whether paper secured by cattle is sclf-lic|uidatiiig is a legal one to be determined by the Federal Reserve Hank. Notes for fertilizer. — A farmer's six months' note for commercial fertilizer, discounted and indorsed by a member bank, is agricultural paper eligible for rediscount with the h'cderal Rrscrvc bank. Notes for dairy cattle. — Notes signed by a fanner, the proceeds of which are used for the purchase of cows to be used as dairy cattle, 3o8 Bank and Trade Acceptances are eligible for rediscount at the discretion of the Federal Reserve bank, notwithstanding the fact that the cattle are not primarily pur- chased for "breeding, raising, fattening, and marketing of live stock." Cattle for breeding, grazing or fattening. — Loans on cattle, which are used for breeding, grazing or fattening, may be made under the classification of six months' agricultural paper, and the paper may be rediscounted by a member bank at its Federal Reserve bank. Farmers' notes. — Farmers' notes, the proceeds of which are used for tilling farms, or for draining land already in use as farm land, should be classified as agricultural paper, and are eligible for redis- count. Notes for farm tractors. — Notes given by farmers for the purchase price of tractors where the tractors are used to supplement the work of horses or mules, or are used altogether instead of these animals, should be admitted to discount as agricultural paper when they mature within six months. Agricultural paper, how determined. — Agricultural paper need not be directly secured by agricultural products, but should be genuinely based upon transactions entered upon for agricultural purposes. In such cases, a determination as to whether paper may be classified as agricultural or not is left to general banking prudence. Discount by maker or indorser. — Notes given for the purchase price of a commodity can be classed as agriculture paper eligible for redis- count if they have a maturity exceeding ninety days and if the maker is to use the commodity for an agricultural purpose, regardless of whether the note is discounted by the maker or by the indorser. Paper payable to seller of commodity- — A note may be treated as agricultural paper, whether discounted with the member bank by the farmer as the maker, or by the seller as the indorser, where the farmer makes his note payable to the seller of a commodity, and actually uses the commodity for agricultural purposes. Paper payable to a bank. — Where the farmer makes his note payable to the member bank, and uses the proceeds for an agricultural purpose. Commercial Banking and Credits 309 such a note may likewise be discounted by a Federal Reserve bank as agricultural paper. However, if the farmer does not use or intend to use the commodity purchased for an agricultural purpose, although it is capable of being so used, the note in question should be treated as commercial paper and not as agricultural paper. Agricultural paper, how identified. — A purchasing member bank would have to satisfy itself in some satisfactory way that the bill is substantially of an agricultural character. The nature of the bill, the name of the acceptor, and the name of the drawer would probably indi- cate that a farmer was the purchaser, and an implement dealer the seller of the goods. As sufficient evidence of its agricultural char- acter, a simple memorandum attached to the bill stating that the bill was drawn in payment of agricultural implements, signed either by the acceptor or the drawer, would probably be sufficient. AMOUNT OF PAPER REDISCOUNTABLE BY FEDERAL RESERVE BANKS General Statutory Provisions Amount of paper rediscountable left with discretion of Federal Reserve Board. — Notes, drafts and bills of exchange, drawn or issued for agricultural purposes or based on live stock, and having a maturity not exceeding six months, exclusive of days of grace, may be redis- counted in an amount to be limited to a percentage of the assets of the Federal Reserve bank, to be ascertained and fixed by the Federal Reserve Board. OPINIONS OF COUNSEL AND RULINGS Relating to Amount of Agricultural Paper Rediscountable Limit of agricultural paper rediscountable by Federal Reserve bank. — The total amount of agricultural paper purchased by a I-cderal Reserve bank according to law should not exceed a fixed percentage of its capital stock, to be fixed from time to time for each Federal Reserve bank by the Federal Reserve Board. The percentage fixed by the Board difTers in the various districts. Whenever a district has applied, the maximum limit has been granted, which has been considered to be ninety-nine per cent, of the capital stock. 3IO Bank and Trade Acceptances REDISCOUNT OF COMMODITY PAPER REGULATIONS OF THE FEDERAL RESERVE BOARD Definition of commodity paper. — Commodity paper is defined as a note, draft, bill of exchange, or trade acceptance, accompanied and secured by shipping- documents, or by a warehouse, terminal, or other similar receipt covering approved and readily marketable non-perish- able staples properly insured. OPINIONS OF COUNSEL AND RULINGS Relating to the Rediscount of Commodity Paper Definition of "staples." — Staples include manufactured goods as well as raw materials, provided the goods are non-perishable and have a wide, ready market. Included in this are cotton yarn, flour, and potatoes. Commodity paper includes paper of merchants. — "Commodity paper" includes not only paper originating with the producer, but also paper of merchants and others when the commodity is not carried for speculative or purely investment purposes. Drafts drawn in connection with sales to the United States Gov- ernment excluded. — Drafts drawn in connection with sales to the United States Government of lumber and other materials do not con- form to the requirements of commodity paper. ELIGIBLE COMMODITY PAPER General Statutory Provisions What constitutes eligibility.-7-Notes, drafts and bills of exchange secured by staple agricultural products, or other goods, wares, or merchandise, are eligible commodity paper. REGULATIONS OF THE FEDERAL RESERVE BOARD Relating to Eligible Commodity Paper Conditions governing eligibility. — To be eligible for rediscount at the special rates authorized to be established for commodity paper. Commercial Banking and Credits 311 such a note, draft, bill of exchange, or trade acceptance, must also comply with the respective sections of this regulation applicable to it, must conform to the requirements of the Federal Reserve bank relat- ing to shipping documents, receipts, insurance, etc., and must be a note, draft, bill of exchange, or trade acceptance on which the rate of interest or discount, including commission charged the maker, does not exceed six percentum per annum. OPINIONS OF COUNSEL AND RULINGS Relating to Eligible Commodity Paper Direct discounts of mercantile firms not allowed. — Federal Reserve banks are not allowed to discount commodity paper directly for mer- cantile firms. Drafts drawn in connection with sales to the United States Govern- ment ineligible. — Drafts drawn in connection with sales to the United States Government cannot be treated as bills of exchange, drawn against actually existing value, and are subject to the limitations imposed by Section 5200 of the Revised Statutes, when discounted by national banks. Such drafts do not conform to the requirements of commodity paper as defined by the Federal Reserve Board and should not be discounted at the rate prescribed for such paper. SUSPENSION OF SPECIAL RATE ON COMMODITY PAPER REGULATIONS OF THE FEDERAL RESERVE BOARD Rate for movement of crops. — As the special rate for commodity paper is intended to assist actual producers during crop moving periods, and is not designed to benefit speculators, the Board reserves the right to suspend the special rates herein provided whenever it is apparent that the movement of crops which this rate is intended to facilitate has been practically completed. REDISCOUNT OF RANK ACCEPTANCES REGULATIONS OF THE FEDERAL RESERVE BOARD Banker's acceptance defined. — A banker's acceptance is dcfnied a.-^ a draft or bill of exchange, of which the acceptor is a hank or trust 312 Bank and Trade Acceptances company, or a firni; person, company, or corporation engaged in the business of granting bankers' acceptance credits. OPINIONS OF COUNSEL AND RULINGS Relating to the Rediscount of Bank Acceptances Eligible acceptors, how determined. — The question of determining the eligibility of an acceptor is left to the discretion of the Federal Reserve banks themselves. The Federal Reserve Board does not wish to see concerns regarded as eligible acceptors which are not in the habit of carrying on some acceptance business regularly, and which are not generally of such character and standing as to qualify their acceptance as a "banker's acceptance." Conditions governing negotiability. — A bill of exchange, in order to be negotiable, must be an unconditional order to pay, on demand, or at a fixed or determinable future time, a certain sum of money, to order or to bearer. Conditional bills, what constitutes. — If payment is dependent upon the happening of a certain contingency, the bill is conditional and non-negotiable, as well as if it were confined to the proceeds of a particular fund, and not chargeable to the credit of the drawer. Conditional acceptance. — A general acceptance of a conditional bill, or a conditional acceptance of an unconditional bill, makes the accept- ance a conditional one and destroys its negotiability. ELIGIBLE BANK ACCEPTANCES General Statutory Provisions Conditions governing eligibility. — Any Federal Reserve bank may discount acceptances of the kinds described below in "Regulations of the Federal Reserve Board" which have a maturity at the time of dis- count of not more than three months' sight, exclusive of days of grace, and which are indorsed by at least one member bank. Commercial Banking and Credits 313 REGULATIONS OF THE FEDERAL RESERVE BOARD Relating to Eligible Bank Acceptances Maturity; indorsement; acceptances eligible for rediscount. — Any Federal Reserve bank may rediscount for any of its member banks, bankers' acceptances which have a maturity at the time of discount of not more than three months' sight, exclusive of days of grace. Such acceptances must be indorsed by at least one member bank ; and must grow out of transactions : (i) Involving the exportation or importation of goods; or (2) Involving the domestic shipment of goods, provided shipping documents are attached at the time of acceptance ; or (3) Which are secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title, covering readily marketable staples ; (4) Any Federal Reserve Bank may also acquire drafts or bills of exchange drawn on member banks by banks or bankers in foreign countries or dependencies or insular possessions of the United States, for the purpose of furnishing dollar exchange. To be eligible for rediscount the bill must have been drawn under a credit opened for the purpose of conducting, or settling accounts resulting from, a transaction or transactions involving: d) The shipment of goods between the United States and any foreign country, or between the United States and any of its dependencies or insular possessions, or between foreign coun- tries ; or (2) The domestic shipment of goods, provided shipping docu- ments are attached at the time of acceptance ; or (3) It must be a bill which is secured at the time of acceptance by a warehouse receipt or other such (iocument conveying or securing title covering readily marketable staples; (4) Any Federal Reserve Bank may also acquire drafts or bills drawn by a bank or banker in a foreign country or dej>endcncy or insular possession of the United States for the pur])ose of furnish- ing dollar exchange, and accepted by a member hank. Such drafts or bills may be acquired prior to acceptance provided they have the endorsement of a member bank. 314 Bank and Trade Acceptances OPINIONS OF COUNSEL AND RULINGS Relating to Eligible Bank Acceptances Acceptances indorsed by member banks of another district. — Fed- eral Reserve bank may discount acceptances based on the importa- tion or exportation of goods, provided they have a maturity at time of discount of not more than three months, and provided, further, that they are indorsed by at least one member bank. It is immaterial whether this member bank is located in the district of the Federal Reserve bank which is making the discount or in any other district, the term "member bank" being broad enough to include member banks wherever located. Discount of acceptances not paid at Federal Reserve bank. — Accept- ances, when due, should be paid by checks on the local Federal Reserve bank in order that they may be charged to the account of the acceptor on the day of maturity, or else that acceptances should be paid by checks through the clearings. Federal Reserve banks may, therefore, charge discount for one additional day, except in cases where satisfactory arrangements are made to make actual cash pay- ments at the Federal Reserve bank on the day of maturity. Paper of acceptance corporation. — Acceptances of an acceptance corporation ought to be dealt with exactly as would be the acceptances of a prime private banker. These acceptance corporations are in the same relation to the Federal Reserve System as the private bankers. They cannot become members, but, inasmuch as they expect to give full information about their own financial standing and the nature of their acceptances, and as they exercise a most important function for the further development of our acceptance business, and discount markets, their operation ought to be encouraged in every respect. Gold coin and gold buUion as "goods." — Gold coin and gold bullion may properly be considered as goods. Warehouse receipts of independent warehouses. — The Federal Reserve banks should make sure in purchasing or discounting bank- ers' acceptances or other bills which are secured by v/arehouse receipts, that the receipt is issued by a warehouse which is independent of the borrower. Commercial Banking and Credits 315 Differential rate for member bank acceptances. — The differential rate between member bank acceptances and the acceptances of large non-member institutions, well known throughout the country, and, whose acceptances necessarily have a broad market, usually amount to one-quarter of one per cent. A higher differential rate than this figure is looked upon by the Board as inadvisable. INELIGIBLE BAXK ACCEPTANXES Opinions of Counsel and Rulings Chattel mortgages ineligible. — Federal Reserve banks are directed to consider as ineligible bills drawn against the security of chattel mortgages on cattle and the like, whether accepted by member or non-member banks. Bills payable outside the United States. — Any bill which is payable elsewhere than in the United States would not be eligible for purchase as a banker's acceptance even though eligible in all other respects. The acceptance, however, might properly be purchased as a bill of exchange payable in a foreign country. EVIDENCE OF ELIGIBILITY OF BANK ACCEPTANCES REGULATIONS OF THE FEDERAL RESER\'E BOARD Evidence to be furnished Federal Reserve Bank. — .\ Federal Reserve bank must be satisfied, either by reference to the acceptance iself or otherwise, that it is eligible for rediscount. Satisfactor}' evi- dence of eligibility may consist of a stamp or certificate aflixcd by the acceptor in form satisfactory to the Federal Reserve bank. OPINIONS OF COUNSEL AND RULINGS Relating to Evidence of Eligirilitv nv I'.ank Acceptances Requirement of evidence. — The l""ederal Reserve bank reserves tlu* right to ask State member banks for evidence underlying the certifica- tion given to it, and the bank examiner may require evidence from the 3i6 Bank and Trade Acceptances national banks to this effect. Member banks would, therefore, best protect themselves by stipulating for themselves the right at times to ask for substantiation of assurances given by their customers. MATURITY RELATING TO BANK ACCEPTANCES General Statutory Provisions Period of maturity. — Any Federal Reserve bank may discount acceptances which have a maturity at the time of discount of not more than three months' sight, exclusive of days of grace. REGULATIONS OF THE FEDERAL RESERVE BOARD Relating to Maturity Requirement as to maturity of bankers' acceptances discountable. — Federal Reserve banks may discount for their member banks "bank- ers' acceptances" which have a maturity at the time of discount of not more than three months' sight, exclusive of days of grace. OPINIONS OF COUNSEL AND RULINGS Relating to Maturity of Bank Acceptances Renewals. — Acceptance business of Federal Reserve banks is not restricted to the original transaction only, if the transaction has not been liquidated. Member banks may renew the acceptance when the first acceptance matures, and there is no reason why a Federal Reserve bank may not discount such renewal acceptances, although a Federal Reserve bank must not engage in advance to make such discount of a renewal. INDORSEMENT General Statutory Provisions Acceptances indorsed by member banks discountable. — Any Federal Reserve bank may discount acceptances which are indorsed by at least one member bank. Commercial Banking and Credits 317 Blank indorsement. — An acceptance which is indorsed in blank can change ownership from one holder to another without being indorsed by each subsequent holder, and the title would pass. It might be inter- esting in this connection to note the expression by the Federal Reserve Board to the effect that it looks forward to the time when only bank- ers' acceptances bearing three responsible signatures, being those of the acceptor, the drawer, and the indorser, will be bought. Readily marketable staples. — Any member bank may accept drafts which are secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title covering "readily marketable staples." Banks, as a matter of prudence and protection to themselves, should not consider as eligible any staple which is in its nature so perishable as not to be reasonably sure of maintaining its value as security at least for the life of the draft which is drawn against it. A more extended definition of a readily marketable staple would be "an article of commerce, agriculture or industry, of such uses as to make it the subject of constant dealings in ready markets with such frequent quotations of prices as to make (a) the price easily and definitely ascertainable, and (b) the staple itself easy to realize upon by sale at any time. Acceptance of drafts drawn abroad and secured by foreign ware- house receipts. — A draft drawn abroad, payable in the United .Stales in dollars and secured by a warehouse receipt covering readily market- able staples stored in a warehouse located in a foreign country, is eligible for acceptance by a member bank and after acceptance is eligible for rediscount by a Federal Reserve bank, but is not eligible for purchase by a Federal Reserve bank in the open market. Acceptance of drafts secured by warehouse receipts. — No draft which is secured by a warehouse receipt should properly be consid- ered eligible for acceptance unless the goods covered by the warehouse receipt are being held in storage pending a reasonable immediate sale, shipment, or distribution into the process of manufacture. Any draft therefore which is drawn to carry goods for speculative jjurposes fir for an indefinite period of time without the purpose to sell, ship or manufacture within a reasonable time, should not be considered eligible for acceptance. 3i8 Bank and Trade Acceptances Qualified acceptance of sight draft. — A trade acceptance may be created by an acceptance of a sight draft in which the acceptor agrees to pay at a future date. Ordinarily this would constitute a qualified acceptance, and hence release the drawer and endorsers. If the drawer assents to the qualified acceptance, or does not dissent within a rea- sonable time, the instrument is considered to be a trade acceptance and therefore eligible for discount if otherwise in order. Trade acceptance to finance structural work and other building op- erations in general. — A draft drawn by a manufacturer or material- man upon a builder to cover the cost of materials sold to the builder is eligible for rediscount as a trade acceptance when accepted by the builder. It is equally clear, however, that if the nature of the contract under which the building operations are being conducted is such that the contractor, for instance, does not get title either to the materials furnished or to the building as it is being erected, he cannot properly make a trade acceptance of a draft drawn upon him by the sub-con- tractor or builder, it being apparent that he has not been a purchaser of goods sold. If the drawer of the draft has sold goods to the drawee, the drawee may properly accept, and the draft thus accepted would constitute a trade acceptance if otherwise in conformity with the Board's regulations, but it should be noted that labor in itself is not considered goods within the meaning of these regulations. The Board has ruled, however, that a draft drawn to cover the purchase price of goods sold, plus the cost of installing those goods, may be eligible for acceptance as a trade acceptance. / SECTION VI ACCEPTANCES AS AN INVESTMENT Prime bank acceptances are especially desirable as an investment because they combine in a degjee not found in any other commercial instrument the three important factors of safety, short maturity, and ready convertibility into cash. SAFETY When a bank accepts a draft it has created an obligation which it must, if it is to retain its standing-, pay at maturity. The acceptance of a bank is as good as the bank itself, ranking with its cashier's check or certificate of deposit. But the drawer and indorsers of an accep- tance are also liable, providing it is not paid at maturity and is prop- erly protested. If one is satisfied that the funds he has deposited in his bank are safe, he can certainly find no objection from the stand- point of security to purchasing the acceptance of that same bank, or of another bank equally as good or better. England, which heretofore has financed the foreign commerce of the world, has been enabled to do so largely because her bankers have purchased large amounts of acceptances and have loaned enormous sums at very low rates to dealers to enable them to carry bills. Their long experience has shown them that prime acceptances are the safest short-term investment they can find. Our prime acceptances are just as good as those whicii have proved so satisfactory in England, and possibly better, because an eligible acceptance here is against a shipment of goods or is secured by goods ; the only exception being bills for dollar exchange, in which case they are drawn by a bank and accepted by a bank. MATURITY Few acceptances appear in this market having a maturity longer than four months. The great majority are drawn payal)lc ninety days after sight. Within these limitations the investor can usually secure 320 Bank and Trade Acceptances in the market bills approximating- any maturity he may desire, wfiether it be for only three or four weeks or for the longer period. We have no other form of investment which can compete with acceptances in this respect. The two features just mentioned make prime acceptances especially fitted as an investment for funds of corporations, firms or individuals, being accumulated for a special purpose, which will be paid out within a short time, such as funds for the payment of a dividend. CONVERTIBILITY INTO CASH Under the provisions of the Federal Reserve Act, the various Fed- eral Reserve banks may purchase acceptances in the open market. The acceptances must, of course, be eligible ; that is, must arise out of one of the four kinds of transactions mentioned heretofore. As will be seen, the acceptance of any National bank is eligible. Non-member banks and bankers may make their acceptances eligible by filing with the Federal Reserve Bank a statement of financial con- dition, in form to be approved by the Federal Reserve Board. They must also agree in writing with the Federal Reserve Bank to inform it, upon request, concerning the transactions underlying their accep- tances. Acceptances which the Reserve banks cannot purchase or rediscount are termed ineligible, and do not command as favorable a rate in the market as eligible bills. The figures in any number of the Federal Reserve Bulletin will show the large volume of acceptances which have been purchased by the various Federal Reserve banks. This power to purchase and wil- lingness on the part of the Federal Reserve banks to do so, as evi- denced by the extent of their transactions, make a prime eligible acceptance in the hands of a member bank the most liquid investment that bank has. A member bank desiring to dispose of the acceptances of other banks which it holds, indorses those acceptances and sells them to its Federal Reserve bank at the prevailing rate for the pur- chase of acceptances. It should be noted that bank acceptances are sold to the Federal Reserve banks, not rediscounted. The purchase rates for prime indorsed bills are usually below the rediscount rates for paper. The nearer the acceptance approaches maturity the more favorable rate it commands at the Reserve banks. Commercial Banking and Credits 321 The non-member bank, corporation or individual desiring to dispose of acceptances before maturity has always been able to do so to deal- ers in the open market, and ordinarily at very little difference from the rate at which the bills were purchased. In this connection it must be remembered that acceptances are discounted for the number of days they have to run from date of sale until maturity. Bank acceptances are often drawn for odd amounts, representing the value of a shipment. They vary in size from a few hundred dol- lars to several hundred thousand dollars. It is, therefore, usually possible for an investor to purchase approximately any amount he may desire, ACCEPTANCE OF DRAFTS BY STATE BANK MEMBERS The Federal Reserve Board is without authority to permit a member bank to accept drafts drawn against it in domestic transactions in excess of 50 per cent, of the capital and surplus of the accepting bank. It may authorize a member bank to accept drafts up to 100 per cent., which amount may include both those which grow out of transactions involving the exportation or importation of goods and those which ELIGIBILITY FOR REDISCOUNT OF MEMBER BANK ACCEPTANCES Under the terms of section 13 any draft or bill of exchange which a member bank has the power to accept under the provisions of that section, is technically eligible for rediscount by a Federal Reserve Bank. This does not mean, however, that Federal Reserve Banks arc required by law to rediscount every such acceptance tendered to them for that purpose. In developing a general market for acceptances the Federal Reserve Banks are necessarily called upon to carry a large amount of this class of paper, but it is important that the Federal Reserve Board and the Federal Reserve Banks should take all neces- sary steps to insure conservatism in the exercise of the acceptance power by member banks. The policy of the Board, therefore, as re- flected in its various rulings, has been to caution I-'cderal Reserve Banks that in rediscounting drafts accepted in domestic transactions they should consider, and m many cases investigate, the circumstances under which the draft was accepted in order to determine whether or not the particular transaction complies with the spirit was well as the letter of the statute. PART IV BANK AND TRADE ACCEPTANCES COMMERCIAL BANKING AND CREDITS FORMS, AGREEMENTS, RECORDS, ETC. Form No. 1 (( No. 2 « No. 3 « No. 3 (< No. 4 << No. 5 (< No. 6 (( No. 7, « No. 8 PART IV Forms, Agreements, Records, Etc. Form of Trade Acceptance for General Use, Based on Domestic Sales of Merchandise. Form of Trade Acceptance Based on Domestic Sales of Merchandise, with words "Maturity being in conformity with original terms of purchase," in- serted. 3a. (Front) Form of Trade Acceptance with Explanation Slip for Buyer. 3b. (Reverse) Form of Trade Acceptance with Record Slip for Buyer. Form of Trade Acceptance Adapted for General Use. Form of Trade Acceptance Adapted for General Use. Form of Trade Acceptance Adapted for General Use. Form of Trade Acceptance Adapted for General Use. Method of Propaganda Used by Commercial Houses to Encourage the Use of Trade Acceptances. No. 9. Method Employed by Commercial Houses to Point Out the Advantages in the Use of Trade Accept- ances. No. 10. Acceptances in Foreign Countries (Canadian Prac- tice). No. 11. Ordinary Banker's Acceptance; Specimen Bill Drawn Locally. No. 12. Bank Acceptance Arising Out of a Foreign Transac- tion ; Specimen of Bill Drawn in a Foreign Country. No. 13. Forms of Certificates Used to Indicate Eligibilitv of Bankers' Acceptances for Re-discount with Fed- eral Reserve Banks. No. 14. Specimen of Bank Acceptance Arising Out of a Trans- action Involving the Exportation or Importation of Goods. No. 15. Bank Acceptance Arising Out of a Transaction In- volving the Domestic Shipment of Goods. No. 16. Form of P.ank Accei)tance Based upon a Transaction Involving Warehouse Rcceii)ts. No. 17. Commercial Domestic Acceptance Agreement. 325 326 << « Bank and Trade Acceptances No. 18. Commercial Acceptance Agreement Used in Connec- tion with Acceptance Credits Granted by a Bank for the Purpose of Financing Imports or Exports or Merchandise Stored in Warehouses in the United States or Abroad. No. 19. Trust Receipt Used in Connection with Acceptance Credits. No. 20. Trust Receipt Used in Connection with Acceptance Credits. No. 21. Trust Receipt (Documents for Warehousing). No. 22. Trust Receipt (For Withdrawal of Collaterals). No. 23. Bailee Receipt. No. 24. Form of Acceptance Register Book. Commercial Banking and Cp£dits 327 FORM NO. 1 Form of Trade Acceptance Based on Domestic Sale of Merchandise u] d ^ I z 8 U|< Q < a: H Saso g Uz < (icirr OP asAvcsi -IS ON- IT MAlVfU THE OBUCATION OF THE AOCEPTC^ HEREOf TO. 0«AMK OP BkAWSa) O JLi_ (STKUT ACOMV) < (an V Gtuwu> |n-c < >• •< o. OF ' HE PUR< Base a ACCEPT T>«SB1U. PA YABte AT AN>.BANK B. MKER C « TT*Uy COMPA * IN T> K tNn«> STATES WHICH «; MAT OesjCNATE 1 PA f TO THE ORDER OF OURSELVES BY- -DOLLARS (J_ -) OOCXS FROM THE ORAWEK. THE DRAWEE MAT >• EXPLANATION— FORM NO. 1 Form of Trade Acceptance Based on Domestic Sales of Merchandise The acceptance is daily becoming more popular. It eliminates the old system of "open accounts." Instead of a merchant selling to a buyer on 60 days open account, the buyer accepts a draft at (50 days date or sight, which the merchant can discount witii his bankers, thus avoiding a tie-up of his capital. Some authorities have suggested that the words "maturity being in conformity with original terms of purchase" be inserted following the word "drawer" where it first appears in the form above, the purpose being to guard against the use of the trade acceptance in settlement of past due accounts. It should be remembered that trade accept- ances are used in connection with current transactions only. 328 Bank and Trade Acceptances FORM NO. 2 Form of Trade Acceptance Based on Domestic Sale of Merchandise, with Words "Maturity Purchase" Inserted - t . t TRADE ACCEPTANCE Due-' r-i-'- 0,1^10 No.137- /-. hi^w York, NVT., --r.-r ;• i: / , m, a— $15, "00 .00 - ■ :;ir.ety dryj------0-i----w:---~~^'i-J£-after dai-e^^.^ . ---pay to the order of OURSELVES F^^tl'en vhcAi-'i^'^L- "S :c'-: V!!k^;0Q.''lOO..---- --=--- .----^-Dollars : Th^Mgation ef th|ia£cept^3iei;e^ irises out of the purchaseof goods from the drawer, maturity' beita in con|opnuty[i.'kh orL^^ial tef^of purchase. The dr;iwee may accept this bill payabk' at anvibaiik, t«st; compai^y oi^ankers office in the- United States which he may designate, iName ri draw**' P -,<■'. ■■ "it? .-In -J.I •,, _-,.,,_> ■ .,, , . . ■ "'■"■ ■^_, • ■ (Scif« aiirrMl i; -3 - ibisnatu.fo.' drawers . ' -„.^;- ..-■ — V-- ^j .,■: -^. ; 1 : ' • EXPLANATION— FORM NO. 2 With the exception of the words "maturity being in conformity with original terms of purchase," this form of acceptance is the same as form No. 1. These words are inserted for the purpose of guarding against the use of the acceptance in settlement of past due accounts. Commercial Banking and Cbzdits 329 FORM NO. 3A FRONT Form of Trade Acceptance (Front) with explanation slip for buyer ^ cr<3 p ^ ly) I— I v^ q->B.^ ^ PUS pNorq P o =r rD > n o P 3 n 3* n 3 P C CO I ^ 3 p. c/^ 3-3 '^ ^3 s-g g.3 3 W3---5 " O S; »n X '^ ^ c^ ci^ r- r^3^p ^Z 3" 2 rs 3 rt- cr 2^ .^ p P p ^ 3* 3 E'8 5^ '=^^ cr nJPd c o — n. C 5 «^ 3 O -1 Vi C/3 w: p -r^' 3 2. &. H -. 31:^0 5 o 3-p »T* ^ ^ v; O ^2 p 3-0 -^ (^ 3 ,^ ^ :t. Si :;• 7/ 9 0^ CfQ O MITSUBISHI CO. (MITSUBISHI COSHI KA.ISHA.) laO BROXDMr'AY, N. Y. CITY rORM or TRADE ACCIPTANCB APPROVED AND AOOPTCO Bt RAW SILK TRADE COUNCIL P 3 p *-l 0. 8 d W B> 3* >^ n O) n » a. t-4 $3 -1 3" ■Jl ^ n Q cr 1 H 3* t-i H r^ 3* n > SJ 0. 7) 33 CL rt ;| > «' /» /* 3 5 bT n • ft) e;} ro o ■-I a> O d in r < w vO w 330 Bank and Trade Acceptances FORM NO. 3B REVERSE Form of Trade Acceptance (Reverse) with Record Slip for Buyer EXPLANATION— FORM NO. 3A (FRONT) ; FORM NO. 3B (REVERSE) This form of trade acceptance serves the same purpose as those shown in forms Nos. 1 and 2 preceding, and in addition, furnishes an advantage in recording the particulars of the transaction. In usage, the seller fills in the particulars required in the trade acceptance and sends it along with the part following to the acceptor, the reverse side of which serves as a record sheet for the latter. After having been ac- cepted, the trade acceptance is returned to the seller. FORMS OF TRADE ACCEPTANCE The following forms of trade acceptances are given for the con- venience of commercial and financial houses, from which a choice may be made of a particular form which is best adapted to their use. The principles involved in the use of trade acceptances being the same, the only difference in the following is in the wording: CoMMEnciAL Banking and Credits FORM NO. 4 Form of Trade Acceptance Adapted for General Use 331 No. SJTRADE ACCEITANCi; O •fe ..aft« r. The obligation of the acceptor^ereof arise ^ut of To_ Due. w < 9 ...pi.y to tbf! order of OURSELVES i Specimen Form .19 t_ ..DOLLARS. e pure i%se of ( Ada from the drawer. ..19 o a. IS ur ii To TRADL ACCEPTANCE cjfWr datj) fay t< 9 t OICO Nc Specimen Form .19. the order of OURSELVES "« DoUaa (Uted. By- Due. .19 a Vi 332 Bank and Trade Acceptances FORM NO. 6 Form of Trade Acceptance Adapted for General Use No. Thirty Sixty Ninety ) Q ! days after < O { Cd To date f ^ sight Thi ?obU( akises out of the a J flon of )urchas i Specimen Form 19— I. ay to t^e orde|^f OURSELVES 1 I ■s - ~ ..Dollars. #16 acceptor hereof s of goods from the drawer. 19 4> 1 c FORM NO. 7 Form of Trade Acceptance Adapted for General Use No.. Q u ..f«.. u u < To- I (Nan e of Pa; ee) I ■8- 1. The :£■■ « yi 5 <« ariiia out < gthe pufehase L to account of e o Q 2 c (Name of Corporation) Dollars. Treasurer. Commercial Banking and Cp£dits 333 FORM NO. 8 Method of Propaganda used by Commercial Houses to encourage the use of Trade Acceptances Before you decide how you will settle the accompanying account may we request you to consider the three methods by which purchases of "American Merchandise" products may be retired. NO. 1 Discounting less 2% 10 days from date of ship- ment. RESULT A saving to you of 2% In return for the Investment of your capital in goods which you have yet to sell. NO. 2 Completing and returning the Trade Acceptance or Negotiable Receipt attach- ed. RESULT A saving of 1% In cost, and 60 days' time during which you may use the re- ceipts coming in from the sale of the goods before you will be called upon to make any investment in them. The strengthening of your credit standing by adver- tising your promptness in meeting obligations. NO. S Making payment net, SO days from date of shipment. RESULT Necessitates paying full price for goods which might be purchased for 99% of list price. Parting with full cost within 30 days when by co- operation and taking advant- age of up-to-date methods 60 days' time might ha legit- imately taken. It Is evident that methods No. 1 and No. 2 lead to profitable results while method No. 3 is unprofitable to purchaser and seller alike. Purchasing on an open-account basis Is rapidly becoming to be looked upon as unprofitable, Inefficient and therefore obsolete. Give Trade Acceptances on Discount. a O Z •< H 0. H O y a < c 04 Nsw York. N. T «.... days after date pay to the order of American Merchandise Distributing Co. Dollars The obligation of the acceptor hereof arises out of the purchase of goods from the drawer. In Settlement of our Invoice of 1».. AMERICAN MERCHANDISE DIBTRIBUTINQ CO. To. By President EXPLANATION— FORM NO. 8 Form No. 8 illustrates a method of i)ropagaiula used by coiiiiiuTcial houses to encourage the use of Acceptances. It points out clearly the usual forms of settling accounts and the advantages and disadvantages which accompany such modes of settlement. 334 Bank and Trade Acceptances FORM NO. 9 Method employed by commercial Houses to point out the advantages in use of trade acceptance American Merchandise Distributing Co. Products are Cheaper if purchaeed on acceptance terms instead of open account. Had you accepted the draft sent you with original invoice of $ 100 this purchase would have cost you but $ ijo a saving of $ ioo> and you would have had until 19. . . ., to make settlement into the bargain. In other words you can carry American Merchandise Dis- tributing Co. products without investing a $ $ $ of your capital providing you can turn a jobber quantity of our goods in 60 days. NEXT TIME WHY NOT SETTLE VIA THE TRADE ACCEPTANCE IT WILL PAY YOU AND PROVE CONVENIENT. EXPLANATION— FORM NO. 9 This form is sent to purchasers, with a receipt for cash settlement, pointing out the advantages in the use of the trade acceptance as a means of settling accounts. It is, as the preceding form, a good meth- od of propaganda encouraging the use of trade acceptances. Commercial Banking and Cp£dits FORM NO. 10 Acceptances in Foreign Countries (Canadian Practice) 335 TO THE UNION BANK OF CANADA Tb* uaoed bin for |- -»Jb ^AjL^J^a< . ^NATIONAL CITY BANK OF NEW YORK NEW YORK CITY O^^^^'V^^gg^i^ '^'o-A-^i^l^ ^3^ It J5FECIMEN BILL DRAWN LOCALLY Specimen Bill Drawn Locally '': : EXPLANATION— FORM NO. 11. Form of Bank Acceptance — Specimen Bill Drawn Locally As will be seen from an examination of the particulars contained in the acceptance, the purchaser, having arranged with his bank to have them accept drafts drawn upon them by the seller, the bank, in con- formity with this acceptance agreement between itself and the pur- chaser, accepts such drafts drawn on it by the seller. After accept- ance the draft becomes a "bank acceptance." The bank acceptance is a very high form of commercial paper and usually has a much bet-, ter credit and commercial standing than the trade acceptance. Commercial Banking and Cpzdits 337 FORM NO. 12 Bank Acceptance Arising out of a Foreign Transaction W:9Uii^ '^yO^^axM^Jae^ .Pjwjniunder creditllvC. B^ J.^ff ^/<-^O^L^C/^^'<-'ljt' <^e€l^<. SPECIMEN BILL DRAWN IN FOREIGN COUNTRT Specimen Bill Drawn in a Foreign Country EXPLANATION— FORM NO. 12 Bank Acceptance — Specimen Bill Drawoi in Foreign Country This form differs from form No. 11 only in that the drawer is domi- ciled in a foreign country instead of in the United States. This form of bank acceptance arises also from an agreement between llie bank and the purchaser, whereby the bank agrees to accej)t drafts drawn upon it up to a stipulated amount, by the shippers of goods abroad. Generally, the purchasers agree to supply the bank with funds with which to meet the draft at maturity. 338 Bank and Trade Acceptances FORM NO. 13 Forms of Certificates Used to Indicate Eligibility of Bankers' Accpt- ances for Rediscount with the Federal Reserve Banks EXPORT OR IMPORT BILL This acceptance is based upon a transaction involving the exporta- tion or the importation of merchandise. Name of Acceptor. DOMESTIC SHIPMENT BILL At the time of acceptance, this bill was secured by shipping docu- ments evidencing the domestic shipment of goods against which it was drawn. Name of Acceptor. WAREHOUSE BILL At the time of acceptance, this bill was secured by documents con- veying or securing title, covering readily marketable staples stored in the United States. Name of Acceptor. The above forms are employed and illustrated in the three following bank acceptances. EXPLANATION— FORM NO. 13 Forms of certificates to be affixed by rubber stamps or in typewrit- ing by a State bank, banker, or a trust company, for the purpose of showing that an acceptance is eligible for rediscount with the Federal Reserve Banks. These forms are employed and illustrated in the three bank acceptances following. Commercial Banking and Credits 339 FORM NO. 14 Specimen of Bank Acceptance Arising out of a Transaction Involving the Exportation or Importation of Goods ^ APrll avth. y/.Q/3. EXPLANATION— FORM NO. 14 The form of certificate to the left is one of the three given in No. 13, and is here shown as it would appear on a bank acceptance. Under the Federal Reserve Act, an acceptance to be eligible for rediscount, must arise out of a transaction involving the exportation or importa- tion of goods, a domestic shipment bill, or a warehouse receipt. This draft falls within the first class of acceptances eligible for rediscount with the Federal Reserve Banks. 340 Bank and Trade Acceptances FORM NO. 15 Bank Acceptance Arising out of a Transaction Involving the Domestic Shipment of Goods EXPLANATION— NO. 15 This bank acceptance differs from No. 14 only in the form of certif- icate indicating its origin. In No. 14, the bank acceptance is based upon a transaction or transactions involving the importation or the exportation of goods. The acceptance illustrated to the left is one "evidencing the domestic shipment against which it was drawn." When this certificate is affixed by the bank, banker or trust company to the instrument, it becomes a bank acceptance eligible for rediscount with the Federal Reserve Banks. It is assumed that the transaction is bona fide and as stated and that the drafts conform in all other respects to the rules and regulations of the Federal Reserve Board. Commercial Banking and Cpedits 341 FORM NO. 16 Form of Bank Acceptance Based upon a Transaction Involving Warehouse Receipts groTldenae. R. I.. Itoy t, 1915 Jinaty (80) .Xi^auiM^4fr± ftt* ^w/?/D^ ^raelvea j'ea Twenty-two and 63/100 Kf ^ ^ The Anerl-oaa ^oheaage national Bank, ^/^■<^n/rVXt balea of ootton ^ »Ay*BLC Jff TMC AMtHICAN tXCHAMOC-NATlOMAL B^kNK.NIW VONK. EXPLANATION— FORM NO. 16 To the left is a form of Bank acceptance based upon a transaction involving warehouse receipts. Note that the form here is dilYcrent, though the purpose and idea are the same as in the bank acceptances illustrated in Nos. 14 and 15 preceding. As a time saver, this form is undoubtedly the better of the three, and can moreover be used for any of the three purposes described. An acceptance of this class is eligi- ble for rediscount with the Federal Reserve Banks. 342 Bank and Trade ActEtTANCES FORM NO. 17 COMMERCIAL DOMESTIC ACCEPTANCE AGREEMENT (a) Giving Rise to Bankers' Acceptances For and in consideration of the acceptance by Trust Company/Bank of my/our draft on it numbered dated payable for Dollars ($ ), and all other drafts which may hereafter be ac- cepted by the Trust Company/Bank at my/our request, I/We hereby agree to place said Trust Company/ Bank in possession of sufficient funds in cash previous to the maturity of said draft, and of any other drafts which said Trust Company/Bank may hereafter from time to time accept, to meet the maturity of said draft or drafts respectively, together with commission and interest as agreed. I/We also assume all responsibility of, and said obligation to place said Trust Company/Bank in funds shall not be affected or impaired by, any risk or error in the course of transmission of telegrams and cablegrams or the loss of letters or other docu- ments which may be sent in connection with the said drafts. In the event of my/our suspension, failure or assignment for the benefit of creditors, or of a petition in bankruptcy being filed against me/us, or the non-fulfillment of any obligation here- under on my/our part to be performed, all obligations and liabil- ties to said Trust Company/Bank on my/our part shall imme- diately, without notice, accrue and mature, and become due and payable, and it is also agreed that in any of those events, the said Trust Company/Bank may take such action with respect to the collection of any or all of said drafts as it may deem advisa- ble to protect its interests and I/We hereby agree to indemnify and save said Trust Company/Bank harmless from any loss, costs, damage, expense (including reasonable attorneys' fees), suffered or incurred by reason of such action or by reason of my /our failure to perform any of the obligations arising here- under. This obligation shall continue in force and remain applicable notwithstanding any change in the individuals comprising our firm, whether such change shall arise from the ascession of one or more new partners or from the death, retirement or succes- sion of any partner or partners. All rights arising under this agreement shall be determined according to the laws of the State of (L. S.). Commercial Banking and Credits 343 EXPLANATION— FORM NO. 17 Herewith is Given a Form of Acceptance Agreement Here, a purchaser, through arrangement with his bank, may have the seller draw his draft on the latter and accepted by such bank, instead of by himself. As the transaction is one to be carried out entirely within the United States, it is called a Commercial Domes- tic Acceptance Credit. This is the usual acceptance agreement between the customer and the bank, whereby the bank undertakes to accept drafts which may be drawn upon it by the seller, on behalf of the buyer, the latter under- taking to supply the bank (acceptor) with funds with which to meet the drafts as they fall due. 344 Bank and Trade Acceptances FORM NO. 18 ACCEPTANCE AGREEMENT Used in Connection with Acceptance Credits Granted by a Bank for the Purpose of Financing Imports or Exports to or from the United States, or Merchandise Stored in Warehouses in the United States or Abroad while await- ing shipments to this or another country (Front) For and in consideration of the acceptance by GUARANTY TRUST COMPANY OF NEW YORK, of my/our draft on it numbered dated payable for Dollars ($ ), and all other drafts which may hereafter be accepted by the Guaranty Trust Company of New York at my/our request, I/we hereby deposit and assign and transfer to said Trust Company as collateral security for the payment of said drafts at maturity, as well as for the payment of any and every debt or liability of every nature from the undersigned to said Trust Company. with such additional collaterals as may from time to time be required by any of the officers of said Trust Company, and which the under- signed hereby promises to furnish on demand. And the undersigned hereby gives to said Trust Company, or its assigns, full power to sell, assign and deliver the whole or any part of said collaterals, or any sub- stitutes therefor, or any additions thereto, at any Brokers' Exchange or elsewhere at pubHc or private sale, at the option of such holder, on the non-performance of any of the promises herein contained, and without notice of amount due or claimed to be due, without demand of payment, without advertisement and without notice of the time or place of sale, each and every of which is hereby expressly waived ; and on any such sale the Trust Company, its assigns or any of the officers of said Trust Company, may purchase on its own account and without further accountability except for the purchase price thereof the whole or any part of the property sold free from any right of redemp- tion on the part of the undersigned, which right is hereby waived and released. It is further agreed, that any surplus arising from the sale of said collaterals, beyond the amount due hereon, shall be applicable upon any claim of the said Trust Company arising directly or by assign- Commercial Banking and Cejedits 345 ment against the undersigned at the time of said sale, whether the same be then due or not due. And it is further agreed that any moneys or properties, at any time, in the possession of GUARATY TRUST COMPANY OF NEW YORK belonging to any of the parties liable hereon to said Trust Company, and any deposits, balance of deposits or other sum at any time credited by or due from said Trust Company to any of said par- ties, shall at all times be held and treated as collateral security for the payment of any other obligation, indebtedness or liability of the under- signed to the said Trust Company, whether due or not due, and said Trust Company may at any time, at its option, set off the amount due or to become due hereon or any other obligations against any claim of any of said parties against said Trust Company. And I/we also agree to place said Trust Company in possession of sufficient funds in cash previous to the maturity of said draft, and of any other drafts which the said Trust Company may hereafter from time to time accept to meet the maturity of said draft or drafts respec- tively, together with commission as agreed and any interest which may accrue thereon, calculated at the rate of six per cent (6%) per annum. Any and all drafts or bills of exchange now or hereafter de- livered by me/us to said Trust Company to be collected shall be deliv- ered to and received by it as security for said acceptance or accept- ances without impairing in any way my/our obligation hereunder to place said Trust Company in funds before the maturity of said accept- ance or acceptances as aforesaid, and all documents relating to such bills for collection shall likewise be held and received by said Trust Company as security with the privilege of delivering same to drawees upon acceptance or acceptances unless instructions to the contrary shall be attached to each bill. The said Trust Company shall have the right to apply the proceeds of such collections against the payment of said acceptance or accept- ances and of any other indebtedness due or to become due from mc/us. It is expressly agreed that I/we assume all responsibility for the col- lection of drafts or bills delivered as aforesaid and for any loss, costs or expenses suffered or incurred by said Trust Company in connec- tion therewith, and that said Trust Company shall l)c held free of responsibility for, and my/our obligation to place said Trust Comi)any in funds as aforesaid shall not be affected or impaired by, any default, neglect, suspension, insolvency or bankruptcy of any correspondt-iit or sub-agent, to whom said bills or drafts may be entrusted ior collec- tion or for any delay in remittance, loss in exchange, or the loss of the said drafts or bills or their proceeds during transmission or in the course of their collection, and I/we expressly agree to assume ail re- sponsibility for, and that my/our said obligation to said Trust Com- pany shall not be affected or impaired by, the non-payment of any bills of exchange which may be received by said Trust Company or by any collecting bank, agent or sub-agent in payment of such drafts or bills of exchange. 346 Bank and Trade Acceptances I/we also assume all responsibility of, and said obligation to place said Trust Company in funds shall not be affected or impaired by, any risk or error in the course of transmission of telegrams and cable- grams or the loss of letters or other documents which may be sent in connection with the said drafts or bills for collection. I/we also agree that in the event that any of the said Trust Com- pany's correspondents, agents or sub-agents for collection of said drafts or bills shall advise it that any of said drafts or bills are not promptly accepted or paid, or in the event of the suspension, failure or assignment for the benefit of creditors, or by the filing of a petition in bankruptcy against the drawee or the drawees of any of said bills for collection, that I/we will immediately upon receipt of such notice, waiving protest, and notice of protest, pay or cause to be paid to said Trust Company in cash the face amount of any such draft or bill for collection which has not been accepted or the drawee of which has suspended, failed or assigned or against whom a petition in bank- rutpcy has been filed as aforesaid. In the event of my /our suspension, failure or assignment for the benefit of creditors, or of a petition in bankruptcy being filed against me/us, or the non-fulfillment of any obligation hereunder on my/our part to be performed, all obligations and liabilities to said Trust Com- pany on my/our part shall immediately, without notice, accrue and mature and become due and payable, and it is also agreed that in either of those events, said Trust Company may take such action with respect to the collection of any or all of said drafts and bills delivered as aforesaid for collection as it may deem advisable to protect its inter- ests, and I/we hereby agree to indemnify and save said Trust Com- pany harmless from any loss, costs, damage, expense (including rea- sonable attorneys' fees), suffered or incurred by it by reason of such action or by reason of my/our failure to perform any of the obligations arising hereunder. This obligation shall continue in force and remain applicable not- withstanding any change in the individuals comprising our firm, whether such change shall arise from the accession of one or more new partners or from the death, retirement or succession of any part- ner or partners. All rights arising under this agreement shall be determined accord- ing to the laws of the State of New York. • ••••••••••••••••••• Xt7 • • • • (Reverse side) WHEREAS, the undersigned has/have requested the Guaranty Trust Company of New York to accept the drafts mentioned and described in the accept- ance agreement of dated the of 19 printed on the reverse side hereof, and WHEREAS, the said Guaranty Trust Company of New York is Commercial Banking and Credits 347 willing to execute such acceptances provided the undersigned will unconditionally guarantee to it the prompt payment at maturity of the said drafts and of any other drafts of which the said Trust Company may hereafter accept from time to time. NOW, IN CONSIDERATION OF THE PREMISES and of the sum of One Dollar to the undersigned in hand paid, the receipt whereof is herby acknowledged, the undersigned do hereby uncon- ditionally guarantee to the said GUARANTY TRUST COMPANY OF NEW YORK, its successors, endorsees and assigns, the prompt payment at maturity of any and all drafts accepted by the GUAR- ANTY TRUST COMPANY OF NEW YORK, pursuant to said acceptance agreement, and any and all renewals and extensions there- of, the prompt performance by of all the terms, conditions and covenants contained in said acceptance agree- ment, and the payment of every debt and liability of to the Guaranty Trust Company of New York. The undersigned hereby consents to any renewal and extension of time of payment of any draft, drafts or other indebtedness that may be granted by the Guaranty Trust Company of New York, and do .... also consent that the securities set forth in said acceptance agreement may be exchanged or surrendered from time to time with- out notice to, or further assent from the undersigned, and that the undersigned will remain bound upon this guarantee notwithstanding such changes, surrenders, renewals and extensions. The undersigned expressly waives presentment, demand of pay- ment, protest and notice of dishonor of said drafts and acceptances thereof, and does also waive notice of the nonperformance on the part of of any of the provisions or covenants of the aforesaid acceptance agreement on his/its/their part to be per- formed and notice of any sale of the collateral securties aforesaid. This guarantee is made without any limitation as to duration or amount, and the undersigned agree that it shall continue and that the said Guaranty Trust Company of New York may con- tinue to act on the faith thereof to any extent until such time as the said Trust Company shall receive from me/us written notice of its withdrawal ; which notice, however, shall not in any wise affect any draft and acceptance theretofore made or any other liability thereto- fore incurred, whether then due and payable or thereafter to become due and payable, and not fully paid at the time of the receipt by the said Trust Company of said notice. The undersigned declares to and covenants with the said Guaranty Trust Company of New York, its successors, endorsees and assigns, that the undersigned ha— no defense whatsoever to any action, suit or proceeding at law, or otherwise, that may be instituted upon this guar- This guarantee shall be construed in accordance with the laws of the State of New York. 348 Bank and Trade Acceptances IN WITNESS WHEREOF, the undersigned ha— set his/our hand and seal this day of X«/ • • • • (L.S.). EXPLANATION— FORM NO. 18 Acceptance Agreement Copy of an "acceptance agreement" which is used in connection with acceptance credits granted by a bank for the purpose of financing imports or exports to or from the United States, or merchandise stored in warehouses in this country, or in warehouses in other countries, while awaiting shipment to the United States, or another country. This form of agreement is signed by the client of the bank at the time the credit is arranged for. There is no material difference between the operation of an accept- ance which arises out of a foreign transaction and one between commer- cial firms in this country, except that in the latter, the mode of payment would be in "dollars" whereas in the former, it may be made avail- able to the drawer in the currency of his locality. Such drafts being accepted by the bank, become "bank acceptances" drawn in a foreign country. (Form No. 12). FORM NO. 19 Trust Receipt Used in Connection With Acceptance Credits Received from the TRUST COMPANY/BANK, hereinafter called the TRUST COMPANY/BANK, the following goods and merchandise, their property specified in warehouse re- ceipt/bill of lading. warehouse, dated consignor, consignee goods described as follows : In consideration thereof we hereby agree to hold said goods and merchandise in trust for said TRUST COMPANY/BANK and as its Commercial Banking and Cpedits 349 property and subject to its order, and it is understood and agreed that the warehouse receipt/bill of lading and the goods and merchandise represented thereby and any other document of title which may be is- sued in respect thereof is held by us only as trustees for the benefit of the TRUST COMPANY/BANK, without giving us any title to the goods and merchandise they represent, except as trustees for the bene- fit of said TRUST COMPANY/BANK. It is agreed that we are to have power subject to the same conditions, to sell or manufacture, or cause to be manufactured, products from such goods and merchandise, and to sell such manufactured products for the account of and as trus- tees for said TRUST COMPANY/BANK. We further agree to keep said property or manufactured products thereof insured against fire, payable in case of loss to the said TRUST COMPANY/BANK as interest may appear, with the understanding that it is not to be chargeable for any expense incurred thereby, the intention of the arrangement being to protect and preserve the title of the TRUST COMPANY/BANK to the goods or proceeds thereof without expense. Signed EXPLANATION— FORM NO. 19 Trust Receipt Form to be signed and returned to bank by purchaser or party in whose behalf bank has accepted. The purpose of the "trust receipt" in "bank acceptances" is to give to the purchaser, upon his signing the "trust receipt" possession or right to possession of the goods covered by it, governed by limitations as to mode of payment, guaranty, secu- rity, etc., to be given by the "purchaser" to the bank. Trust receipts are sometimes accepted as temporary collateral from responsible par- ties in exchange for shipping documents or warehouse receipts. They are also used in connection with Import and Export Letters of Credit and loans. 350 Bank and Trade Acceptances FORM NO. 20 Trust Receipt Used in Connection With Acceptance Credits Received from River National Bank of St. Louis the following goods and merchandise, their property, specified in the Bill of Lading per R. R., Dated marked and num- bered as follows: and, in consideration thereof, WE HERBY AGREE TO HOLD SAID GOODS IN TRUST for them, and as their property, with lib- erty to sell the same for their account, and further agree, in case of sale, to hand the proceeds to them to apply against the acceptances of River National Bank of St. Louis on our account, under the terms of the Letter Credit No for our account and for the pay- ment of any other indebtedness of ours to River National Bank of St. Louis. The River National Bank of St. Louis, may at any time cancel this trust and take possession of said goods, or of the proceeds of such of the same as may then have been sold, wherever the said go©ds or proceeds may then be found and in the event of any suspension, or failure, or assignment for the benefit of creditors, on our part, or of the non-fulfillment of any obligation, or of the non-payment at maturity of any acceptance made by us under said credit, or under any other credit issued by River National Bank of St. Louis, on our account or of any indebtedness on our part to them, all obligations, accept- ances, indebtedness and liabilities whatsoever shall thereupon (with or without notice) mature and become due and payable. The said goods while in our hands shall be fully insured against loss by fire. Dated, New York City 19. (Signed) $. Commercial Banking and Cp£Dits 351 EXPLANATION— FORM NO. 20 Trust Receipt This form of trust receipt is used for the same purposes as that in No. 19. The only difference between the two is in the wording. 352 Bank and Trade Acceptances FORM NO. 21 Trust Receipt (DOCUMENTS FOR WAREHOUSING) RECEIVED from The Guaranty Trust Co. of New York Bill of Lading per dated for the following goods and merchandise, their property, marked and num- bered as follows: imported under the terms of Letter of Credit No , issued by them for my/our account the said Bill of Lading to be used by me/us for the sole purpose of entering the above described property at the United States Custom House at the Port of and of storing the sam.e in the name, and as the property, of the said The Guaranty Trust Co. of New York, and sub- ject only to their order, I/we hereby agreeing to so store the said property and to hand the storage receipt for the same to the said The Guaranty Trust Co. of New York, when obtained. I/we ALSO AGREE to fully insure said property against fire, the loss, if any, payable to said The Guaranty Trust Co. of New York, and to hand to them the policies of insurance thereon. Dated 19. (Signed) Commercial Banking and Cpzdits 353 EXPLANATION— FORM NO. 21 Trust Receipt (DOCUMENTS FOR WAREHOUSING) This form of Trust Receipt is also used in connection with Import Letters of Credit, and it is temporarily accepted against the surrender of shipping documents in order that the goods covered by such doc- uments may be placed in warehouse, and pending the delivery of the warehouse receipt. This form of Trust Receipt is used covering the delivery of mer- chandise actually sold, the relative shipping documents being surrend- ered to the client against his trust receipt in order to enable him to make delivery to the buyer. 354 Bank and Trade Acceptances FORM NO. 22 Trust Receipt for Withdrawal of Collaterals Trust Receipt for Withdrawal of Collaterals Loan of New York, Received from Guaranty Trust Co. of New York, the following prop- erty held by the Guaranty Trust Co. of New York, as collateral se- curity: and in consideration thereof we/I hereby agree, acting as agents for the Guaranty Trust Co. of New York, in this matter, to hold said property in trust, for the following purposes only, viz : with the understanding that we/ I will hand the as soon as received to the Guaranty Trust Co. of New York, the inten- tion of this agreement being to protect and preserve unimpaired the lien of the Guaranty Trust Co. of New York, on said property. Commercial Banking and Cpzdits 355 EXPLANATION— FORM NO. 22 The "Trust Receipt for Withdrawal of Collaterals" illustrated at the left, upon its being signed and returned to the bank, passes possession or right to possession of the goods, to the signatory, the latter at the same time recognizing the lien of the bank on said property. 35^ Bank and Trade Acceptances FORM NO. 23 Bailee Receipt RECEIVED from the GUARANTY TRUST COMPANY OF NEW YORK solely for the purpose of selling same for account of said Company: marked and numbered and hereby undertake to sell the property herein speci- fied, for account of the said Company, and collect the proceeds of the sale or sales thereof, and deliver the same immediately on receipt thereof to the said Company, to be applied to the credit of hereby acknowledging to be Bailee of the said property for the said Company, and do hereby assign and transfer to the said Company the accounts of the purchaser or purchasers of said property to the extent of the pur- chase price thereof, of which fact notice shall be given at the time of delivery of the said property by to such purchaser or purchasers and all invoices therefor shall have imprinted, written or stamped thereon by the following : "Transferred and payable to GUARANTY TRUST COMPANY OF NEW YORK, 140 Broadway, New York." If the said property is not sold and the proceeds so deposited within ten days from this date, undertake to return all doc- uments at once on demand, or to pay the value of the goods, at the Company's option. The said goods while in my/our hands shall be fully insured against loss by fire. The terms of this receipt and agreement shall continue and apply to the merchandise above referred to whether or not control of the same, or any part thereof, be at any time restored to the Guaranty Trust Company of New York, and subsequently delivered to us. Dated at New York City, 19 Commercial Banking and Cpzdits 357 EXPLANATION— FORM NO. 23 Bailee Receipt This form of receipt is very specific as to the terms and conditions under which possession of merchandise is obtained. 3S8 Bank and Trade Acceptances e Z I n t 4> 8 G a 0) "S5 S u o 3 a. ^i Commercial Banking and Ckzdits 359 EXPLANATION— FORM NO. 24 Form of Record Book for Acceptances, Drafts, Bills, Notes, etc. The Trade Acceptance accompanies the invoice and is sent to the purchaser, who accepts same. At the time it is sent to such pur- chaser a record is taken of the sale by a proper entry in the sales book, as in the "open account method." The acceptance when re- turned to the seller is then entered in the "acceptance register" from where it may be posted to the ledger to offset the outstanding in- debtedness of the customer. Some firms treat the acceptance as an entire cancellation of the debt; others merely as a matter of record. PART V BANK AND TRADE ACCEPTANCES COMMERCIAL BANKING AND CREDITS LAWS The Negotiable Instruments Law, Digest of the Federal Bill of Lading Law, The United States Warehouse Act, Laws Relating to the Taxation of Negotiable Instruments, Checks, Drafts, Bank and Trade Acceptances, and Promissory Notes THE NEGOTIABLE INSTRUMENTS LAW The purpose of which is to make uniform throughout the United States the law relating to negotiable commercial paper. PRELUDE TO THE NEGOTIABLE INSTRUMENTS LAW The Negotiable Instruments Law was codified and approved by- several States in the Union in the year 1897, and was adopted in whole or in part, within the few following years by a majority of the States. In the few jurisdictions of the United States where the Negotiable Instruments Law has not been passed, the law relating to bills, notes and checks is based on the principles of the common law, which is a series of rules and precedents originating in the Courts of England and the United States, and which were decided during the past few centuries on questions as they arose from time to time. The Negotiable Instruments Law in such States in which it was passed, does not abolish the entire system of common law governing bills, notes and checks, but only restates the rules of the common law which existed prior to the enactment of the Statute. The com- mon law, where it conflicts with the Statute Law, gives precedence to the latter, though the common law still remains important due to the fact that cases frequently arise which are not clearly covered by the Statutes. This particular point is clearly outlined in Section 196 of the Law of Negotiable Instruments which provides that in cases not provided for by the Statute, the unwritten law prevails. Below is given a list of the States and territories which have adopted the Negotiable Instruments Law in whole or in great part. For any variation, reference must be made to the Statute of that par- ticular State. LIST OF STATES AND TERRITORIES IN WHICH THE NEGOTIABLE INSTRUMENTS LAW HAS BEEN ADOPTED Alabama. Laws of 1907, No. 722, p. 6G0. In effect January 1. 1908. Arizona. Rev. St. 1901, p. 852; Laws 1905, Ch. 23. In effect Sep- tember 1, 1901. Arkansas. Laws of 1913, Act 81. In effect April 22. 1913. Colorado. Laws of 1897, Ch. HI. Approved April 20, 1897. 363 364 Bank and Trade Acceptances Connecticut. Laws of 1897, Ch. 74. Approved April 5, 1897. Delaware. Laws of 1911, Ch. 191. In effect January 1, 1912. District of Columbia. Laws of 1899, Chap. 47 ; 30 U. S. Stat, at L., p. 785. In effect April 3, 1899. Florida. Laws of 1897, Chap. 4524. Approved June 1, 1897. Hawaii. Laws of 1907, Act 89. In effect April 20, 1907. Idaho. Laws of 1903, p. 380. In effect March 10, 1903. Illinois. Laws of 1907, p. 403. Approved June 5, 1907. Indiana. Laws of 1913, Chap. 63. Approved March 3, 1913. Iowa. Laws of 1902, Chap. 130 ; Laws of 1906, Chap. 149. Approved April 12, 1902. Kansas. Laws of 1905, Chap. 310. In effect June 8, 1905. Kentucky. Laws of 1904, Chap. 102. Approved March 24, 1904. Louisiana. Laws of 1904, Act 64. Approved June 29, 1904. Maryland. Laws of 1898, Chap. 119. Approved March 29, 1898. Massachusetts. Laws of 1898, Chap. 533; Laws of 1899, Chap. 130. In effect January 1, 1899. Michigan. Laws of 1905, Chap. 265, p. 389. Approved June 16, 1905. Minnesota. Laws of 1913, Chap. 272. In effect July 1, 1913. Missouri. Laws of 1905, p. 243. Approved April 10, 1905. Montana. Laws of 1903, Chap. 121. In effect March 7, 1903. Nebraska. Laws of 1905, Chap. 83. In effect August 1, 1905. Nevada. Laws of 1907, Chap. 62. In effect May 1, 1907. New Hampshire. Laws of 1909, Chap. 123. In effect January 1, 1910. New Jersey. Laws of 1902, Chap. 184. Approved April 4, 1902. New Mexico. Laws of 1907, Chap. 83. Approved March 21, 1907. New York. Laws of 1897, Chap. 612; Laws of 1898, Chap. 336. In effect October 1, 1897. North Carolina. Laws of 1899, Chap. 733; Laws of 1905, Chap. 327; Laws of 1907, Chap. 897. In effect March 8, 1899. North Dakota. Laws of 1899, Chap. 113. Approved March 7, 1899. Ohio. Laws of 1902, p. 162. In effect January 1, 1903. Oklahoma. Laws of 1909, Chap. 24. In effect June 10, 1909. Oregon. Laws of 1899, p. 18. Approved February 16, 1899. Pennsylvania. Laws of 1901, p. 194. In effect September 2, 1901. Rhode Island. Laws of 1899, Chap. 674. In effect July 1, 1899. South Carolina. Laws of 1914, Act No. 396, p. 668. Vetoed by the governor March 4, 1914, and passed by both Houses over his veto. South Dakota. Laws of 1913, Chap. 279. Approved March 4, 1913. Commercial Banking and Cpedits 365 Tennessee. Laws of 1899, Chap. 94. In effect May 16, 1899. Utah. Laws of 1899, Chap. 83. In effect July 1, 1899. Vermont. Laws of 1912, p. 114. In effect June 1, 1913. Virginia. Laws of 1898, Chap. 866. Approved March 3, 1898. Washington. Laws of 1899, Chap. 149. In effect March 22, 1899. West Virginia. Laws of 1907, Chap. 81. In effect January 1, 1908. Wisconsin. Laws of 1899, Chap. 356. In effect May 15, 1899. Wyoming. Laws of 1905, Chap. 43. In effect February 15, 1905. Article I. II. III. IV. V. VI. VII, VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. XVII. XVIII. THE NEGOTIABLE INSTRUMENTS LAW Page General provisions 365 Form and interpretation of negotiable instruments. . . . 367 Consideration 373 Negotiation 374 Rights of holder 378 Liabilities of parties 380 Presentment for payment 382 Notice of dishonor 386 Discharge of negotiable instruments 391 Bills of exchange ; form and interpretation 393 Acceptance 394 Presentment for acceptance 397 Protest 399 Acceptance for honor 101 Payment for honor '102 Bills in a set 404 Promissory notes and checks '105 Notes given for patent rights and for a speculative consideration 1^^* THE NEGOTIABLE INSTRUMENTS LAW ARTICLE I. General Provisions. §1. Short title. §2. Definitions and meaning of terms. §3. Person primarily liable on instrument. §4. Reasonable time, what constitutes. 366 Bank and Trade Acceptances §5. Time, how computed; when last day falls on holiday. §6. Application of chapter. §7. Rule of law merchant; when governs. §1. Short title. — This act shall be known as the Negotiable Instru- ments Law. §2. Definitions and meaning of terms. — In this act, unless the con- text otherwise requires : "Acceptance" means an acceptance completed by delivery or notifi- cation. "Action" includes counter-claim and set-off. "Bank" includes any person, or association of persons carrying on the business of banking, whether incorporated or not. "Bearer" means the person in possession of a bill or note which is payable to bearer. "Bill" means bill of exchange, and "note" means negotiable promis- sory note. "Delivery" means transfer of possession, actual or constructive, from one person to another. "Holder" means the payee or indorsee of a bill or note, who is in pos- session of it, or the bearer thereof. "Indorsement" means an indorsement completed by delivery. "Instrument" means negotiable instrument. "Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder. "Person" includes a body of persons, whether incorporated or not. "Value" means valuable consideration. "Written" includes printed, and "writing" includes print. §3. Person primarily liable on instrument. — The person "primarily" liable on an instrument is the person who by the terms of the instru- ment is absolutely required to pay the same. All other parties are "sec- ondarily" liable. §4. Reasonable time, what constitutes. — In determining what is a "reasonable time" or an "unreasonable time," regard is to be had to the nature of the instrument, the usage of trade, or business (if any) with respect to such instruments, and the facts of the particular case. Commercial Banking and Cp£dits 367 §5. Time, how computed; when last day falls on holiday. — Where the day, or the last day, for doing any act herein required or permitted to be done falls on Sunday or on a holiday, the act may be done on the next succeeding secular or business day. §6. AppHcation of chapter. — The provisions of this act do not apply to negotiable instruments made and delivered prior to the passage hereof. §7. Law merchant; when governs. — In any case not provided for in this act the rules of the law merchant shall govern. ARTICLE 11. Form and Interpretation. §20. Form of negotiable instrument. §21. Certainty as to sum ; what constitutes. §22. When promise is unconditional. §23. Determinable future time; what constitutes. §24. Additional provisions not affecting negotiability. §25. Omissions; seal; particular money. §26. When payable on demand. §27. When payable to order. §28. When payable to bearer. §29. Terms, when sufficient. §30. Date, presumption as to. §31. Ante-dated and post-dated. §32. When date may be inserted. §33. Blanks, when may be filled. §34. Incomplete instrument not delivered. §35. Delivery; when effectual; when presumed. §36. Construction where instrument is ambiguous. §37. Liability of person signing in trade or assumed name. §38. Signature by agent; authority; how shown §39. Liability of person signing as agent, ct cetera. §40. Signature by procuration; effect of. §41. Effect of indorsement by infant or corporation. §42. Forged signature ; effect of. 368 Bank and Trade Acceptances §20. Form of negotiable instrument. — An instrument to be nego- tiable must conform to the following requirements : 1. It must be in writing and signed by the maker or drawer ; 2. Must contain an unconditional promise or order to pay a sum certain in money ; 3. Must be payable on demand, or at a fixed or determinable future time ; 4. Must be payable to order or to bearer; and 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. §21. Certainty as to sum ; what constitutes. — The sum payable is a ^um certain within the meaning of this act, although it is to be paid ; 1. With interest ; or .2. By stated instalments ; or 3. By stated instalments, with a provision that upon default in pay- ment of any instalment or of interest, the whole shall become due ; or 4. With exchange, whether at a fixed rate or at the current rate; or 5. With costs of collection or an attorney's fee, in case payment shall not be made at maturity. §22. When promise is unconditional. — An unqualified order or promise to pay is unconditional within the meaning of this act, though coupled with : 1. An indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the amount ; or 2. A statement of the transaction which gives rise to the instru- ment. But an order or promise to pay out of a particular fund is not un- conditional. §23. Determinable future time; what constitutes. — An instrument is payable at a determinable future time, within the meaning of this act, which is expressed to be payable : 1. At a fixed period after date or sight; or 2. On or before a fixed or determinable future time specified therein ; or 3. On or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of happening be uncer- tain. CoMMEPCiAL Banking \nd Cpzdits 369 An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. §24. Additional provisions not affecting negotiability. — An instru- ment which contains an order or promise to do any act in addition to the payment of money is not negotiable but the negotiable character of an instrument otherwise negotiable is not affected by a provision which : 1. Authorizes the sale of collateral securities in case the instru- ment be not paid at maturity ; or 2. Authorizes a confession of judgment if the instrument be not paid at maturity ; or 3. Waives the benefit of any law intended for the advantage or protection of the obligor; or 4. Gives the holder an election to require something to be done in lieu of payment of money. But nothing in this section shall validate any provision or stipula- tion otherwise illegal. §25. Omissions; seal; particular money. — The validity and nego- tiable character of an instrument are not affected by the fact that : 1. It is not dated ; or 2. Does not specify the value given, or that any value has been given therefor ; or 3. Does not specify the place where it is drawn or the place where it is payable ; or 4. Bears a seal ; or 5. Designates a particular kind of current money in whicli i>aymcnt is to be made. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. §26. When payable on demand.— :\n instrument is payable on de- mand : 1. Where it is expressed to be payable on demand, or at sight, or on presentation ; or 2. In which no time for payment is expressed. Where an instrument is issued, accepted or indorsed when over- due, it is, as regards the person so issuing, accepting or indc.r.sing it, payable on demand. 370 Bank and Trade Acceptances §27. When payable to order. — The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of; 1. A payee who is not maker, drawer or drawee; or 2. The drawer or maker; or 3. The drawee ; 4. Two or more payees jointly; or 5. One or some of several payees ; or 6. The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. §28. When payable to bearer. — The instrument is payable to bearer: 1. When it is expressed to be so payable ; or 2. When it is payable to a person named therein or bearer; or 3. When it is payable to the order of a fictitious or non-existing per- son, and such fact was known to the person making it so payable ; or 4. When the name of the payee does not purport to be the name of any person ; or 5. When the only or last indorsement is an indorsement in blank. §29. Terms when sufficient. — The instrument need not follow the language of this act, but any terms are sufficient which clearly indi- cate an intention to conform to the requirements hereof. §30. Date, presumption as to. — Where the instrument or an accept- ance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance or indorse- ment, as the case may be. §31. Ante-dated and post-dated. — The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. §32. When date may be inserted. — Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or ac- Commercial Banking and Cpzdits 371 ceptance, and the instrument shall be payable accordingly. The in- sertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. §33. Blanks; when may be filled. — Where the instrument is want- ing in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument, when completed, may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accord- ance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. §34. Incomplete instrument not delivered. — Where an incomplete instrument has not been delivered it will not, if completed and nego- tiated, without authority^ be a valid contract in the hands of any holder, as against any person whose signature was placed thereon be- fore delivery. §35. Delivery; when effectual; when presumed. — Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties, and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made cither by or under the authority of the party making, drawing, accept- ing or indorsing, as the case may be ; and in such case tlic delivery may be shown to have been conditional, or for a special ]nirpose only, and not for the purpose of transferring the i)roperty in the instru- ment. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties jirior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party who.sc signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. 372 Bank and Trade Acceptances §36. Construction where instrument is ambiguous. — Where the language of the instrument is ambiguous, or there are omissions therein, the following rules of construction apply : 1. Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable ; but if the words are ambiguous or uncer- tain, reference may be had to the figures to fix the amount ; 2. Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is un- dated, from the issue thereof; 3. Where the instrument is not dated, it will be considered to be dated as of the time it was issued ; 4. W^here there is a conflict between the written and printed pro- visions of the instrument, the written provisions prevail ; 5. Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election ; 6. Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; 7. Where an instrument containing the words "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. §37. Liability of person signing in trade or assumed name. — No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. §38. Signature by agent; authority; how shown. — The signature of any party may be made by a duly authorized agent. No particu- lar form of appointment is necessary for this purpose ; and the au- thority of the agent may be established as in other cases of agency. §39. Liability of person signing as agent, etc. — Where the instru- ment contains or a person adds to his signature words indicating that he signs for or on behalf of a principal, or in a representative capacity, he is not liable on the instrument if he was duly authorized ; but the Commercial Banking and Cpzdits 373 mere addition of words describing him as an agent, or as filling a rep- resentative character, without disclosing his principal, does not ex- empt him from personal liability. §40. Signature by procuration ; effect of. — A signature by "procura- tion" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. §41. Effect of indorsement by infant or corporation. — The indorse- ment or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of ca- pacity the corporation or infant may incur no liability thereon. §42. Forged signature; effect of. — Where a signature is forged or made without authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party, against whom it is sought to enforce such right, is precluded from setting up the forgery or want of authority. ARTICLE III. Consideration of Negotiable Instruments. §50. Presumption of consideration. §51. What constitutes consideration. §52. What constitutes holder for value. §53. When lien on instrument constitutes holder for value. §54. Effect of want of consideration. §55. Liability of accommodation party. §50. Presumption of consideration.— Every negotiable instrument is deemed prinm facie to have been issued for a valuable con.sidcration ; and every person whose signature appears thereon to have become a party thereto for value. §51. Consideration; what constitutes.— Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing 374 Bank and Trade Acceptances debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. §52. What constitutes holder for value. — Where value has at any- time been given for the instrument, the holder is deemed a holder for value in respect to all parties who became such prior to that time. §53. When lien on instrument constiutes holder for value. — Where the holder has a lien on the instrument, arising either from contract or by implication of law, he is deemed a holder for value, to the extent of his lien. §54. Effect of want of consideration. — Absence or failure of consid- eration is matter of defense as against any person not a holder in due course ; and partial failure of consideration is a defense protanto, whether the failure is an ascertained and liquidated amount or other- wise. §55. Liability of accommodation party. — An accommodation party is one who has signed the instrument as maker, drawer, acceptor or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommoda- tion party. ARTICLE IV. Negotiation. §60. What constitutes negotiation. §61. Indorsement; how made. §62. Indorsement must be of entire instrument. §63. Kinds of indorsement. §64. Special indorsement; indorsement in blank. §65. Blank indorsement; how changed to special indorsement. §66. When indorsement .restrictive. §67. Effect of restrictive indorsement; rights of indorsee. §68. Qualified indorsement. §69. Conditional indorsement. Commercial Banking and Cpedits 375 §70. Indorsement of instrument payable to bearer. §71. Indorsement where payable to two or more persons. §72. Effect of instrument drawn or indorsed to a person as cashier. §73. Indorsement where name is misspelled, et. cetera. §74. Indorsement in representative capacity. §75. Time of indorsement; presumption. §76. Place of indorsement; presumption. §77, Continuation of negotiable character. §78. Striking out indorsement. §79. Transfer without indorsement; eflFect of. §80. When prior party may negotiate instrument. §60. What constitutes negotiaton. — An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery, if payable to order it is negotiated by the indorsement of the holder completed by delivery. §61, Indorsement; how made. — The indorsement must be written on the instrument itself or upon a paper attached thereto. The signa- ture of the indorser, without additional words, is a sufficient indorse- ment. §62. Indorsement must be of entire instrument. — The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instru- ment. But where the instrument has been paid in part, it may be indorsed as to the residue. §63. Kinds of indorsement. — An indorsement may be cither .special or in blank; and it may also be cither restrictive or qualified, or con- ditional. §64. Special indorsement; indorsement in blank. — A si)ccial in- dorsement specifies the person to whom, or to whose order the instru- ment is to be payable ; and the indorsement of such indorsee i.s neces- sary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is i)ay- able to bearer, and may be negotiated by delivery. Z7^ Bank and Trade Acceptances §65. Blank indorsement; how changed to special indorsement. — The holder may convert a blank indorsement into a special indorse- ment by writing over the signature of the indorser in blank any con- tract consistent with the character of the indorsement. §66. When indorsement restrictive. — An indorsement is restrictive, which either: 1. Prohibits the further negotiation of the instrument; or 2. Constitutes the indorsee the agent of the indorser ; or 3. Vests the title in the indorsee in trust for or to the use of some other person. But the mere absence of words implying power to negotiate does not make an indorsement restrictive. §67. Effect of restrictive indorsement; rights of indorsee. — A re- strictive indorsement confers upon the indorsee the right: 1. To receive payment of the instrument; 2. To bring any action thereon that the indorser could bring; 3. To transfer his rights as such indorsee, where the form of the in- dorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first in- dorsee under the restrictive indorsement. §68. Qualified indorsement. — A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. §69. Conditional indorsement. — Where an indorsement is condi- tional a party required to pay the instrument may disregard the con- dition and make payment to the indorsee or his transferee, whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing con- ditionally. §70. Indorsement of instrument payable to bearer. — Where an in- strument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially Commercial Banking and Cfedits 377 is liable as indorser to only such holders as make title through his indorsement. §71. Indorsement where payable to two or more persons. — Where an instrument is payable to the order of two or more payees or in- dorsees who are not partners, all must indorse, unless the one indors- ing has authority to indorse for the others. §72. Effect of instrument drawn or indorsed to a person as cashier. — Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corjX)ration, it is deemed prima facie to be payable to the bank or corporation of which he is such officer; and may be negotiated by either the indorsement of the bank or corporation, or the indorsement of the officer. §73. Indorsement where name is misspelled, et cetera. — Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described, adding, if he thinks fit, his proper signature. §74. Indorsement in representative capacity. — Where any person is under obligation to indorse in a representative capacity, he may in- dorse in such terms as to negative personal liability. §75. Time of indorsement; presumption. — Except where an indorse- ment bears date after the maturity of the instrument every negotia- tion is deemed prima facie to have been effected before the instrument was overdue. §76. Place of indorsement ; presumption. — Except where the contrary appears every indorsement is presumed prima facie to have been made at the place where the instrument is dated. §77. Continuation of negotiable character. — An instrument negotia- ble in its origin continues to be negotiable until it has been restric- tively indorsed or discharged by payment or otherwise. §78. Striking out indorsement. — The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument. 378 Bank and Trade Acceptances §79. Transfer without indorsement; effect of. — Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the trans- ferror had therein, and the transferee acquires, in addition, the right to have the indorsement of the transferror. But for the purpose of deter- mining whether the transferee is a holder in due course, the negotia- tion takes effect as of the time when the indorsement is actually made. §80. When prior party may negotiate instrument. — Where an in- strument is negotiated back to a prior party, such party may, subject to the provisions of this act, reissue and further negotiate the same. But he is not entitled to enforce payment thereof against any inter- vening party to whom he was personally liable, ARTICLE V. Rights of Holder. §90. Right of holder to sue ; payment. §91. What constitutes a holder in due course. §92. When person not deemed holder in due course. §93. Notice before full amount paid. §94. When title defective. §95. What constitutes notice of defect. §96. Rights of holder in due course. §97. When subject to original defenses. §98. Who deemed holder in due course. §90, Right of holder to sue ; payment. — The holder of a negotiable instrument may sue thereon in his own name ; and payment to him in due course discharges the instrument. §91. What constitutes a holder in due course. — A holder in due course is a holder who has taken the instrument under the following conditions : 1. That it is complete and regular upon its face ; 2. That he became the holder, of it before it was overdue, and with- out notice that it had been previously dishonored, if such was the fact. 3. That he took it in good faith and for value ; 4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person nego- tiating it. Commercial Banking and Cpedits 379 §92. When person not deemed holder in due course. — Where an in- strument payable on demand is negotiated an unreasonable length of time after its issue, the holder is not deemed a holder in due course. §93. Notice before full amount paid. — Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount theretofore paid by hinx §94. When title defective. — The title of a person who negotiates an instrument is defective within the meaning of this act when he obtains the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. §95. What constitutes notice of defect. — To constitute notice of an infirmity in the instrument or defect in the title of the person nego- tiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. §96. Rights of holder in due course. — A holder in due course holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. §97. When subject to original defenses. — In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holder in due course, and who is not him- self a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. §98. Who deemed holder in due course. — Every holder is deemed prima facie to be a holder in due course ; but when it is shown that the title of any person who has negotiated the instrument was defective, 380 Bank and Trade Acceptances the burden is on the holder to prove that he or some person under whom he claims acquired the title as a holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. ARTICLE VI. Liability of Parties. §110. Liability of maker. §111. Liability of drawer. §113. Liability of acceptor. §113. When person deemed indorser. §114. Liability of irregular indorser. §115. Warranty; where negotiation by delivery, et cetera. §116. Liability of general indorsers. §117. Liability of indorser where paper negotiable by delivery. §118. Order in which indorsers are liable. §119. Liability of agent or broker. §110. Liability of maker. — The maker of a negotiable instrument by making it engages that he will pay it according to its tenor; and ad- mits the existence of the payee and his then capacity to indorse. §111. Liability of drawer. — The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that on due presentment the instrument will be accepted and paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own lia- bility to the holder. §112. Liability of acceptor. — The acceptor by accepting the instru- ment engages that he will pay it according to the tenor of his accept- ance ; and admits : 1. The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and 2. The existence of the payee and his then capacity to indorse. Commercial Banking and Cp£dits 381 §113. When person deemed indorser. — A person placing his signa- ture upon an instrument otherwise than as maker, drawer or acceptor is deemed to be an indorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity. §114. Liability of irregular indorser. — Where a person, not other- wise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser in accordance with the fol- lowing rules: 1. If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. 2. If the instrument is payable to the order of the maker or drawer, ■or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. 3. If he signs for the accommodation of the payee he is liable to all parties subsequent to the payee. §115. Warranty where negotiation by delivery, et cetera. — Every person negotiating an instrument by delivery or by a qualified in- dorsement, warrants : 1. That the instrument is genuine and in all respects what it pur- ports to be ; 2. That he has a good title to it; 3. That all prior parties had capacity to contract; 4. That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The pro- vision of subdivision three of this section does not apply to persons negotiating public or corporate securities, other than bills and notes. §116. Liability of general indorser. — Every indorser who indorses without qualification, warrants to all subsequent holders in due course: 1. The matter and things mentioned in subdivisions one, two and three of the next preceding section ; and 2. That the instrument is at the time of his indorsement valid and subsisting. And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dis- 382 Bank and Trade Acceptances honor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. §117. Liability of indorser where paper negotiable by delivery.— Where a person places his indorsement on an instrument negotiable by delivery he incurs all the Habilities of an indorser. §118. Order in which indorsers are liable. — As respects one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that as between or among them- selves they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally. §119. Liability of agent or broker. — Where a broker or other agent negotiates an instrument without indorsement, he incurs all the lia- bilities prescribed by section one hundred and fifteen of this act, un- less he discloses the name of his principal, and the fact that he is acting only as agent. ARTICLE VIL Presentment for Payment. §130. Effect of want of demand on principal debtor. §131. Presentment where instrument is not payable on demand. §132. What constitutes a sufficient presentment §133. Place of presentment. §134. Instrument must be exhibited. §135. Presentment where instrument payable at bank. §136. Presentment where principal debtor is dead. §137. Presentment to persons liable as partners. §138. Presentment to joint debtors. §139. When presentment not required to charge the drawer. §140. When presentment not required to charge the indorser. §141, When delay in making presentment is excused. §142. When presentment may be dispensed with. §143. When instrument dishonored by non-payment. §144. Liability of person secondarily liable, when instrument dis- honored. §145. Time of maturity. Commercial Banking and Cpedits 383 §146. Time ; how computed. §147. Rule where instrument payable at bank. §148. What constitutes payment in due course. §130. Effect of want of demand on principal debtor. — Presentment for payment is not necessary in order to charge the person primarily li- able on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity and has funds there available for that purpose, such abiilty and will- ingness are equivalent to a tender of payment upon his part. But ex- cept as herein otherwise provided, presentment for payment is neces- sary in order to charge the drawer and indorsers. §131. Presentment where instrument is not payable on demand. — Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, pre- sentment must be made within a reasonable time after its issue, ex- cept that in case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotia- tion thereof. §132. What constitutes a sufficient presentment. — Presentment for payment, to be sufficient, must be made : 1. By the holder, or by some person authorized to receive payment on his behalf; 2. At a reasonable hour on a business day ; 3. At a proper place as herein defined ; 4. To the person primarily liable on the instrument, or if he is ab- sent or inaccessible, to any person found at the place where the pre- sentment is made. §133. Place of presentment. — Presentment for payment is made at the proper place : 1. Where a place of payment is specified in the instrument and it is there presented ; 2. Where no place of payment is specified, but the address of the person to make payment is given in the instrument and it is there presented ; 3. Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment. 384 Bank and Trade Acceptances 4. In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. §134. Instrument must be exhibited. — The instrument must be ex- hibited to the person from whom payment is demanded, and when it is paid must be delivered up to the party paying it. §125. Presentment where instrument payable at bank. — Where the instrument is payable at a bank, presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it at any time during the day, in which case presentment at any hour before the bank is closed on that day is suf- ficient. §136. Presentment where principal debtor is dead. — Where the per- son primarily liable on the instrument is dead, and no place of payment is specified, presentment for payment must be made to his personal representative, if such there be, and if with the exercise of reasonable diligence, he can be found. §137. Presentment to persons liable as partners. — Where the per- sons primarily liable on the instrument are liable as partners, and no place of payment is specified, presentment for payment may be made to any one of them, even though there has been a dissolution of the firm. §138. Presentment to joint debtors. — Where there are several per- sons not partners, primarily liable on the instrument, and no place of payment is specified, presentment must be made to them all. §139. When presentment not required to charge the drawer. — Pre- sentment for payment is not required in order to charge the drawer where he has not right to expect or require that the drawee or acceptor will pay instrument. §140. When presentment not required to charge the indorser. — Presentment for payment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation, and he has no reason to expect that the instrument will be paid if presented. Commercial Banking and Cb£dits 385 §141. When delay in making presentment is excused. — Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable dili- gence. §142. When presentment may be dispensed with. — Presentment for payment is dispensed with : 1. Where after the exercise of reasonable diligence presentment as required by this act cannot be made ; 2. Where the drawee is a fictitious person ; 3. By waiver of presentment express or implied. §143. When instrument dishonored by non-payment. — The instru- ment is dishonored by non-payment when : 1. It is duly presented for payment and payment is refused or can- not be obtained ; or 2. Presentment is excused and the instrument is overdue and un- paid. §144. Liability of person secondarily liable, when instrument dis- honored. — Subject to the provisions of this act, when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon, accrues to the holder. §145. Time of maturity. — Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instrument is payable on the next succeeding business day. Instruments falling due or becoming paya- ble on Saturday are to be presented for payment on the next succeed- ing business day, except that instruments payable on demand may, at the option of the holder, be presented for payment before 12 o'clock noon on Saturday when that entire day is not a holiday. §146. Time ; how computed. — Where the instrument is payable at a fixed period after date, after sight, or after the happening of a speci- fied event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment. 386 Bank and Trade Acceptances §147. Rule where instrument payable at bank. — Where an instru- ment is made payable at a bank it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. §148. What constitutes payment in due course. — Payment is made in due course when it is made at or after the maturity of the instru- ment to the holder thereof in good faith and without notice that his title is defective. ARTICLE VIII. Notice of Dishonor. §160. To whom notice of dishonor must be given. §161. By whom given. §162. Notice given by agent. §163. Effect of notice given on behalf of holder. §164. Effect where notice is given by party entitled thereto. §165. When agent may give notice. §166. When notice sufficient. §167. Form of notice. §168. To whom notice may be given. §169. Notice where party is dead. §170. Notice to partners. §171. Notice to persons jointly liable. §172. Notice to bankrupt. §173. Time within which notice must be given. §174. Where parties reside in same place. §175. Where parties reside in different places. §176. When sender deemed to have given due notice. §177. Deposit in post-office, what constitutes. §178. Notice to subsequent parties, time of. §179. Where notice must be sent. §180. Waiver of notice. §181. Whom affected by waiver. §182. Waiver of protest. §183. When notice dispensed with. §184. Delay in giving notice ; how excused. §185. When notice need not be given to drawer. §186. When notice need not be given to indorser. Commercial Banking and Cpzdits 387 §187. Notice of non-payment where acceptance refused, §188. Effect of omission to give notice of non-acceptance. §189. When protest need not be made; when must be made. §160. To whom notice of dishonor must be given. — Except as here- in otherwise provided, when a negotiable instrument has been dis- honored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or in- dorser to whom such notice is not given is discharged. §161. By whom given. — The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given. §162. Notice given by agent. — Notice of dishonor may be given by an agent either in his own name or in the name of any party entitled to give notice whether that party be his principal or not. §163. Effect of notice given on behalf of holder. — Where notice is given by or on behalf of the holder, it inures for the benefit of all sub- sequent holders and all prior parties who have a right of recourse against the party to whom it is given. §164. Effect where notice is given by party entitled thereto. — Where notice is given by or on behalf of a party entitled to give notice, it in- ures for the benefit of the holder and all parties subsequent to the party to whom notice is given. §165. When agent may give notice. — Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon, or he may give notice to his prin- cipal. If he give notice to his principal, he must do so within the same time as if he were the holder, and the principal, upon the receipt of such notice, has himself the same time for giving notice as if the agent had been an independent holder. §166. When notice sufficient. — A written notice need not be signed, and an insufficient written notice may be supplemented and validated 388 Bank and Trade Acceptances by verbal communication. A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is given is in fact misled thereby. §167. Form of notice. — The notice may be in writing or merely oral, and may be given in any terms which sufficiently identify the instru- ment, and indicate that it has been dishonored by non-acceptance or non-payment. It may in all cases be given by delivering it personally or through the mails. §168. To whom notice may be given. — Notice of dishonor may be given either to the party himself or to his agent in that behalf. §169. Notice where party is dead. — When any party is dead, and his death is known to the party giving notice, the notice must be giv- en to a personal representative, if there be one, and if with reasonable diligence he can be found. If there be no personal representative, no- tice may be sent to the last residence or last place of business of the deceased. §170. Notice to partners. — Where the parties to be notified are part- ners, notice to any one partner is notice to the firm, even though there has been a dissolution. §171. Notice to persons jointly liable. — Notice to joint parties who are not partners must be given to each of them, unless one of them has authority to receive such notice for the others. §172. Notice to bankrupt.— Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the bene- fit of creditors, notice may be given either to the party himself or to his trustee or assignee. §173. Time within which notice must be given.— Notice may be giv- en as soon as the instrument is dishonored ; and unless delay is excused as hereinafter provided, must be given within the times fixed by this act. §174. Where parties reside in same place.— Where the person giv- ing and the person to receive notice reside in the same place, notice must be given within the following times : Commercial Banking and Credits 389 1. If given at the place of business of the person to receive notice, it must be given before the close of business hours on the day follow- ing; 2. If given at his residence, it must be given before the usual hours of rest on the day following; 3. If sent by mail, it must be deposited in the post-ofifice in time to reach him in usual course on the day following. §175, Where parties reside in different places. — Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times : 1. If sent by mail, it must be deposited in the post-office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on that day, by the next mail thereafter. 2. If given otherwise than through the post-office, then within the time that notice would have been received in due course of mail, if it had been deposited in the post-office within the time specified in the last subdivision. §176. When sender deemed to have given due notice. — Where no- tice of dishonor is duly addressed and deposited in the post-office, the sender is deemed to have given due notice, notwithstanding any mis- carriage in the mails. §177. Deposit in post-office; what constitutes. — Notice is deemed to have been deposited in the post-office when deposited in any branch post-office or in any letter-box under the control of the post-office de- partment. §178. Notice to antecedent party; time of. — Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. §179. Where notice must be sent. — Where a party has added an address to his signature, notice of dishonor must be sent to that ad- dress; but if he has not given such address, then the notice must be sent as follows: 1. Either to the post-office nearest to his place of residence, or to the post-office where he is accustomed to receive his letters; or 390 Bank and Trade AccEPtANCES 2. If he live in one place, and have his place of business in another, notice may be sent to either place ; or 3. If he is sojourning in another place, notice may be sent to the place where he is so sojourning. But where the notice is actually received by the party within the time specified in this act, it will be sufficient, though not sent in ac- cordance with the requirements of this section. §180. Waiver of notice. — Notice of dishonor may be waived, either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be express or implied. §181. Whom affected by waiver. — Where the waiver is embodied in the instrument itself, it is binding upon all parties ; but where it is written above the signature of an indorser, it binds him only. §182. Waiver of protest. — A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest, but also of presentment and notice of dishonor. §183. When notice is dispensed with. — Notice of dishonor is dis- pensed with when, after the exercise of reasonable diligence, it can- not be given to or does not reach the parties sought to be charged. §184. Delay in giving notice; how excused. — Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct or negligence. When the cause of delay ceases to oper- ate, notice must be given with reasonable diligence. §185. When notice need not be given to drawer. — Notice of dis- honor is not required to be given to the drawer in either of the fol- lowing cases: 1. Where the drawer and drawee are the same person; 2. Where the drawee is a fictitious person or a person not having capacity to contract; 3. Where the drawer is the person to whom the instrument is pre- sented for payment; Commercial Banking and Cbedits 391 4. Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; 5. Where the drawer has countermanded payment. §186. When notice need not be given to indorser. — Notice of dis- honor is not required to be given to an indorser in either of the follow- ing cases : , 1. Where the drawee is a fictitious person or a person not having capacity to contract, and the indorser was aware of the fact at the time he indorsed the instrument; 2. Where the indorser is the person to whom the instrument is pre- sented for payment; 3. Where the instrument was made or accepted for his accommo- dation. §187. Notice of non-payment where acceptance refused. — Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted. §188. Effect of omission to give notice of non-acceptance. — An omis- sion to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. §189. When protest need not be made; when must be made. — Where any negotiable instrument has been dishonored it may be protested for non-acceptance or non-payment, as the case may be ; but protest is not required, except in the case of foreign bills of exchange. ARTICLE IX. Discharge of Negotiable Instruments. §200. Instrument; how discharged, §201. When person secondarily liable on, discharged. §202. Right of party who discharges instrument. §203. Renunciation by holder. §204. Cancellation ; unintentional ; burden of proof. §205. Alteration of instrument ; cfTect of. §206. What constitutes a material alteration. 39^ Bank and Trade Acceptances §200. How instrument discharged. — A negotiable instrument is dis- charged : 1. By payment in due course by or on behalf of the principal debtor; 2. By payment in due course by the party accommodated, where the instrument is made or accepted for accommodation ; 3. By the intentional cancellation thereof by the holder; 4. By any other act which will discharge a simple contract for the payment of money; 6. When the principal debtor becomes the holder of the instru- ment at or after maturity in his own right. §201. When persons secondarily liable on, discharged. — A person secondarily liable on the instrument is discharged: 1. By any act which discharges the instrument ; 2. By the intentional cancellation of his signature by the holder; 3. By the discharge of a prior party ; 4. By a valid tender of payment made by a prior party ; 5. By a release of the principal debtor, unless the holder's right of recourse against the party secondarily liable is expressly reserved; 6. By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument, (unless made with the assent of the party secondarily liable, or) un- less the right of recourse against such party is expressly reserved. §202. Right of party who discharges instrument. — Where the instru- ment is paid by a party secondarily liable thereon, it is not discharged ; but the party so paying it is remitted to his former rights as regards all prior parties, and he may strike out his own and all subsequent indorsements, and again negotiate the instrument, except: 1. Where it is payable to the order of a third person, and has been paid by the drawer; and 2. Where it was made or accepted for accommodation, and has been paid by the party accommodated. §203. Renunciation by holder. — The holder may expressly renounce his rights against any party to the instrument, before, at or after its maturity. An absolute and unconditional renunciation ©f his rights against the principal debtor made at or after the maturity of the instrument, discharges the instrument. But a renunciation does not Commercial Banking and Credits 393 affect the rights of a holder in due course without notice. A renuncia- tion must be in writing, unless the instrument is delivered up to the person primarily liable thereon. §204. Cancellation; unintentional; burden of proof. — A cancella- tion made unintentionally, or under a mistake, or without the author- ity of the holder, is inoperative ; but where an instrument or any sig- nature thereon appears to have been cancelled the burden of proof lies on the party who alleges that the cancellation was made unintention- ally, or under a mistake or without authority. §205. Alteration of instrument; effect of. — Where a negotiable in- strument is materially altered without the assent of all parties liable thereon, it is avoided except as against a party who has himself made, authorized or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its original tenor. §206. What constitutes a material alteration. — Any alteration which changes : 1. The date ; 2. The sum payable, either for principal or interest ; 3. The time or place of payment; 4. The number or the relations of the parties ; 5. The medium or currency in which payment is to be made ; Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. ARTICLE X. Bills of Exchange; Form and Interpretation. §210. Bill of exchange defined. §211. Bill not an assignment of funds in hands of drawee. §212. Bill addressed to more than one drawee. §213. Inland and foreign bills of exchange. §214. When bill may be treated as promissory note. §215. Referee in case of need. 394 Bank and Trade Acceptances §210. Bill of exchange defined. — A bill of exchange is an uncondi- tional order in writing addressed by any person to another signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. §211. Bill not an assignment of funds in hands of drawee. — A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same. §212. Bill adressed to more than one drawee. — A bill may be ad- dressed to two or more drawees jointly, whether they are partners or not ; but not to two or more drawees in the alternative or in the suc- cession. §213. Inland and foreign bills of exchange. — An inland bill of ex- change is a bill which is, or on its face purports to be, both drawn and payable within this State. Any other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder may treat it as an inland bill. §214. When bill may be treated as promissory note. — Where in a bill the drawer and drawee are the same person, or where the drawee is a fictitious person, or a person not having capacity to contract, the holder may treat the instrument, at his option, either as a bill of ex- change or a promissory note. §215. Referee in case of need. — The drawer of a bill and any in- dorser may insert thereon the name of a person to whom the holder may resort in case of need, that is to say, in case the bill is dishonored by non-acceptance or non-payment. Such person is called the referee in case of need. It is in the option of the holder to resort to the referee in case of need or not as he may see fit. ARTICLE XL Acceptance of Bills of Exchange. §220. Acceptance, how made, et cetera. §221. Holder entitled to acceptance on face of bill. §222. Acceptance by separate instrument. §223. Promise to accept; when equivalent to acceptance. Commercial Banking and Cbedits 395 §224. Time allowed drawee to accept. §225. Liability of drawee retaining or destroying bill. §226. Acceptance of incomplete bill. §227. Kinds of acceptances. §228. What constitutes a general acceptance. §229. Qualified acceptance. §230. Rights of parties as to qualified acceptance. §220. Acceptance; how made, et cetera. — The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money. §221. Holder entitled to acceptance on face of bill. — The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and if such request is refused, may treat the bill as dishonored. §222. Acceptance by separate instrument. — Where an acceptance is written on a paper other than the bill itself, it does not bind the ac- ceptor, except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value. §223. Promise to accept; when equivalent to acceptance. — An un- conditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person, who, upon the faith thereof, receives the bill for value. §224. Time allowed drawee to accept. — The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; but the acceptance if given dates as of the day of presentation. §225. Liability of drawee retaining or destroying bill. — Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery, or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. 396 Bank and Trade Acceptances §226, Acceptance of incomplete bill. — A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non-payment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any dififerent agreement, is entitled to have the bill accepted as of the date of the first present- ment. §227. Kinds of acceptance. — An acceptance is either general or qual- ified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the eflfect of the bill as drawn. §228. What constitutes a general acceptance. — An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere. §229. Qualified acceptance. — An acceptance is qualified which is: 1. Conditional, that is to say, which makes payment by the ac- ceptor dependent on the fulfillment of a condition therein stated ; 2. Partial, that is to say, an acceptance to pay part only of the amount for which the bill is drawn ; 3. Local, that is to say, an acceptance to pay only at a particular place ; 4. Qualified as to time ; 5. The acceptance of some one or more of the drawees, but not of all. §230. Rights of parties as to qualified acceptance. — The holder may refuse to take a qualified acceptance, and if he doea not obtain an un- qualified acceptance, he may treat the bill as dishonored by non-ac- ceptance. Where a qualified acceptance is taken, the drawer and in- dorsers are discharged from liability on the bill, unless they have ex- pressly or impliedly authorized the holder to take a qualified accept- ance, or subsequently assent thereto. When the drawer or an in- dorser receives notice of a qualified acceptance, he must within a rea- sonable time express his dissent to the holder, or he will be deemed to have assented thereto. Commercial Banking and Cpjidits 397 ARTICLE XII. Presentment of Bills of Exchange for Acceptance. §240. When presentment for acceptance must be made. §241. When failure to present releases drawer and indorser. §242. Presentment; how made. §243. On what days presentment may be made. §244. Presentment ; where time is insufficient. §245. When presentment is excused. §246. When dishonored by non-acceptance. §247. Duty of holder where bill not accepted. §248. Rights of holder where bill not accepted. §240. When presentment for acceptance must be made. — Present- ment for acceptance must be made : 1. Where the bill is payable after sight or in any other case where presentment for acceptance is necessary in order to fix the maturity of the instrument; or 2. Where the bill expressly stipulates that it shall be presented for acceptance ; or 3. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render 'any party to the bill liable. §241. When failure to present releases drawer and indorser. — Ex- cept as herein otherwise provided, the holder of a bill which is re- quired by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reason- able time. If he fails to do so, the drawer and all indorsers are dis- charged. §242. Presentment; how made. — Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a busi- ness day, and before the bill is overdue, to the drawee or some per- son authorized to accept or refuse acceptance on his behalf; and 1. Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all, unless one has au- thority to accept or refuse acceptance for all, in which case present- ment may be made to him only ; 398 Bank and Trade Acceptances 2. Where the drawee is dead, presentment may be made to his per- sonal representative ; 3. Where the drawee has been adjudged a bankrupt or an insol- vent, or has made an assignment for the benefit of creditors, present- ment may be made to him or to his trustee or assignee. §243. On what days presentment may be made. — A bill may be pre- sented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of sections one hun- dred and thirty-two and one hundred and forty-five of this act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day. §244. Presentment where time is insufficient. — Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has not time with the exercise of reasonable diligence to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers. §245. Where presentment is excused. — Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases : 1. Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill ; 2. Where after the exercise of reasonable diligence, presentment cannot be made ; 3. Where, although presentment has been irregular, acceptance has been refused on some other ground. §246. When dishonored by non-acceptance. — A bill is dishonored by non-acceptance : 1. When it is duly presented for acceptance, and such an acceptance as is prescribed by this act is refused or cannot be obtained ; or 2. When presentment for acceptance is excused and the bill is not accepted. §247. Duty of holder where bill not accepted. — Where a bill is duly presented for acceptance and is not accepted within the pre- Commercial Banking and Cpedits 399 scribed time, the person presenting it must treat the bill as dishonored by non-acceptance or he loses the right of recourse against the drawer and indorsers. §248. Rights of holder where bill not accepted. — When a bill is dis- honored by non-acceptance, an immediate right of recourse against the drawers and indorsers accrues to the holder, and no presentment for payment is necessary. ARTICLE XIII. Protest of Bills of Exchange. §260. In what cases protest necessary. §261. Protest §262. Protest §263. Protest §264. Protest how made. by whom made. when to be made, where made. §265. Protest both for non-acceptance and non-payment. §266. Protest before maturity where acceptor insolvent. §267. When protest dispensed with. §268. Protest, where bill is lost, et cetera. §260. In what cases protest necessary. — Where a foreign bill appear- ing on its face to be such is dishonored by non-acceptance, it must be duly protested for non-acceptance, and where such a bill which has not previously been dishonored by non-acceptance is dishonored by non- payment, it must be duly protested for non-payment. If it is not so protested, the drawer and indorsers are discharged. Where a bill docs not appear on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary. §261. Protest ; how made. — The protest must be annexed to the bill, or must contain a copy thereof, and must be under the hand and seal of the notary making it, and must specify : 1. The time and place of presentment; 2. The fact that presentment was made and the manner thereof; 3. The cause or reason for protesting the bill ; 4. The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found. 400 Bank and Trade Acceptances §262. Protest ; by whom made. — Protest may be made by : 1. A notary public; or 2. By any respectable resident of the place where the bill is dishon- ored, in the presence of two or more credible witnesses. §263, Protest; when to be made. — When a bill is protested, such protest must be made on the day of its dishonor, unless delay is ex- cused as herein provided. When a bill has been duly noted, the pro- test may be subsequently extended as of the date of the noting. §264. Protest; where made. — A bill must be protested at the place where it is dishonored, except that when a bill drawn payable at the place of business or residence of some person other than the drawee, has been dishonored by non-acceptance, it must be protested for non- payment at the place where it is expressed to be payable, and no further presentment for payment to, or demand on, the drawee is necessary. §265. Protest both for non-acceptance and non-payment. — A bill which has been protested for non-acceptance may be subsequently protested for non-payment. §266. Protest before maturity where acceptor insolvent. — ^Where the acceptor has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, before the bill matures, the holder may cause the bill to be protested for better security against the drawer and indorsers. §267. When protest dispensed with. — Protest is dispensed with by any circumstances which would dispense with notice of dishonor. De- lay in noting or protesting is excused when delay is caused by cir- cumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, the bill must be noted or protested with reasonable dili- gence. §268. Protest where bill is lost, et cetera. — When a bill is lost or destroyed or is wrongfully detained from the person entitled to hold it, protest may be made on a copy or written particulars thereof. Commercial Banking and Credits 401 ARTICLE XIV. Acceptance of Bills of Exchange for Honor. . §380. When bill may be accepted for honor. §281. Acceptance for honor; how made. §282. When deemed to be an acceptance for honor of the drawer. §283. Liability of acceptor for honor. §284. Agreement of acceptor for honor. §285. Maturity of bill payable after sight; accepted for honor. §286. Protest of bill accepted for honor, et cetera. §287. Presentment for payment to acceptor for honor; hovv made. §288. When delay in making presentment is excused. §289. Dishonor of bill by acceptor for honor. §280. When bill may be accepted for honor. — ^Where a bill of ex- change has been protested for dishonor by non-acceptance or protested for better security and is not overdue, any person not being a party already liable thereon may, with the consent of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is drawn. The acceptance for honor may be for part only of the sum for which the bill is drawn, and where there has been an acceptance for honor for one party, there may be a further acceptance by a different person for the honor of another party. §281. Acceptance for honor; how made. — An acceptance for honor supra protest must be in writing and indicate that it is an acceptance for honor, and must be signed by the acceptor for honor. §282. When deemed to be an acceptance for honor of the drawer. — When an acceptance for honor does not expressly state for whose honor it is made, it is deemed to be an acceptance for the honor of the drawer. §283. Liability of acceptor for honor. — The acceptor for honor is lia- ble to the holder and to all parties to the bill subsequent to the party for whose honor he has accepted. §284. Agreement of acceptor for honor. — The acceptor for honor by such acceptance engages that he will on due presentment pay the 402 Bank and Trade Acceptances bill according to the terms of his acceptance, provided it shall not have been paid by the drawee, and provided also that it shall have been duly- presented for payment and protested for non-payment and notice of dishonor given to him. §285. Maturity of bill payable after sight; accepted for honor. — Where a bill payable after sight is accepted for honor, its maturity is calculated from the date of the noting for non-acceptance and not from the date of the acceptance for honor. §286. Protest of bill accepted for honor, at cetera. — Where a dis- honored bill has been accepted for honor supra protest or contains a reference in case of need, it must be protested for non-payment before it is presented for payment to the acceptor for honor or refere in case of need. §287. Presentment for payment to acceptor for honor ; how made. — Presentment for payment to the acceptor for honor must be made as follows : 1. If it is to be presented in the place where the protest for non- payment was made, it must be presented not later than the day fol- lowing its maturity; 2. If it is to be presented in some other place than the place where it was protested, then it must be forwarded within the time specified in section one hundred and seventy-five. §288. When delay in making presentment is excused. — The pro- visions of section one hundred and forty-one apply where there is de- lay in making presentment to the acceptor for honor or referee in case of need. §289. Dishonor of bill by acceptor for honor. — When the bill is dis- honored by the acceptor for honor it must be protested for non-pay- ment by him. ARTICLE XV. Payment of Bills of Exchange for Honor. §300. Who may make payment for honor. "- §301. Payment for honor ; how made. Commercial Banking and Credits 403 §302. Declaration before payment for honor, §303. Preference of parties offering to pay for honor. §304. Effect on subsequent parties where bill is paid for honor. §305. Where holder refuses to receive payment supra protest. §306. Rights of payer for honor. §300. Who may make payment for honor. — Where a bill has been protested for non-payment, any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose account it was drawn. §301. Payment for honor; how made. — The payment for honor supra protest in order to operate as such and not as a mere voluntary payment must be attested by a notarial act of honor, which may be appended to the protest or form an extension to iL §302. Declaration before payment for honor. — The notarial act of honor must be founded on a declaration made by the payer for honor, or by his agent in that behalf declaring his intention to pay the bill for honor and for whose honor he pays. §303. Preference of parties offering to pay for honor. — Where two or more persons offer to pay a bill for the honor of different parties, the person whose payment will discharge most parties to the bill is to be given the preference. §304. Effect on subsequent parties where bill is paid for honor. — Where a bill has been paid for honor all parties subsequent to the party for whose honor it is paid are discharged, but the payer for honor is subrogated for, and succeeds to, both the rights and duties of the holder as regards the party for whose honor he pays and all par- ties liable to the latter. §305. Where holder refuses to receive payment supra protest. — Where the holder of a bill refuses to receive payment supra protest, he loses his right of recourse against any party who would have been discharged by such payment. §306. Rights of payer for honor. — The payer for honor, on paying to the holder the amount of the bill and the notarial expense incidental to its dishonor, is entitled to receive both the bill itself and the protest. 404 Bank and Trade Acceptances ARTICLE XVI. Bills in a Set. §310. Bills in sets constitute one bill. §311. Rights of holders where different parts are negotiated. §312. Liability of holder who indorses two or more parts of a set to different persons. §313. Acceptance of bills drawn in sets. §314. Payment by acceptor of bills drawn in sets. §315. Effect of discharging one of a set. §310. Bills in sets constitute one bill. — Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill. §311. Rights of holders where different parts are negotiated. — Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is as between such holders the true owner of the bill. But nothing in this section affects the rights of a person who in due course accepts or pays the part first presented to him. §312. Liability of holder who indorses two or more parts of a set to different persons. — Where the holder of a set indorses two or more parts to different persons he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself in- dorsed, as if such parts were separate bills. §313. Acceptance of bills drawn in sets. — The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part, and such accepted parts are nego- tiated to different holders in due course, he is liable on every such part as if it were a separate bill. §314. Payment by acceptor of bills drawn in sets. — When the ac- ceptor of a bill drawn in a set pays it without requiring the part bear- ing his acceptance to be delivered up to him, and that part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon, Commercial Banking and Cpedits 405 §315. Effect of discharging one of a set. — Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or otherwise the whole bill is discharged. ARTICLE XVII. Promissory Notes and Checks. §320. Promissory note defined. §321. Check defined. §322. Within what time a check must be presented. §323. Certification of check; effect of. §324. Effect where holder of check procures it to be certified. §325. When check operates as an assignment. §326. Recovery of forged check. §320. Promissory note defined. — A negotiable promissory note with- in the meaning of this act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him. §321. Check defined. — A check is a bill of exchange drawn on a bank, payable on demand. Except as herein otherwise provided, the pro- visions of this act applicable to a bill of exchange payable on demand apply to a check. §322. Within what time a check must be presented. — A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. §323. Certification of check; effect of. — Where a check is certified by the bank on which it is drawn the certification is equivalent to an acceptance. §324. Effect where the holder of check procures it to be certified. — Where the holder of a check procures it to be accepted or certified the drawer and all indorsers are discharged from liability thereon. 4o6 Bank and Trade Acceptances §325. When check operates as an assignment. — A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder, unless and until it accepts or certifies the check, §326. Recovery of forged check. — No bank shall be liable to a de- positor for the payment by it of a forged or raised check, unless within one year after the return to the depositor of the voucher of such pay- ment, such depositor shall notify the bank that the check so paid was forged or raised. ARTICLE XVIII. Notes Given for Patent Rights and for a Speculative Consideration. This Article appears only in New York and Ohio Jets §330. Negotiable instruments given for patent rights. §331. Negotiable instruments given for a speculative consideration. §332. How negotiable bonds are made non-negotiable. §330. Negotiable instruments given for patent rights. — A promis- sory note or other negotiable instrument, the consideration of which consists wholly or partly of the right to make, use or sell any inven- tion claimed or represented by the vendor at the time of sale to be patented, must contain the words "given for a patent right" prom- inently and legibly written or printed on the face of such note or instrument above the signature thereto ; and such note or instrument in the hands of any purchaser or holder is subject to the same defenses as in the hands of the original holder; but this section does not apply to a negotiable instrument given solely for the purchase price or the use of a patented article. §331. Negotiable instruments for a speculative consideration. — If the consideration of a promissory note or other negotiable instrument con- sists in whole or in part of the purchase price of any farm product, at a price greater by at least four times than the fair market value of the same product at the time, in the locality, or of the membership and rights in an association, company or combination to produce or sell CoMMEPciAL Banking and Credits 407 any farm product at a fictitious rate, or of a contract or bond to pur- chase or sell any farm product at a price greater by four times than the market value of the same product at the time in the locality, the words, "given for a speculative consideration," or other words clearly showing the nature to the consideration, must be prominently and legibly written or printed on the face of such note or instrument above the signature thereof; and such note or instrument, in the hands of any purchaser or holder, is subject to the same defenses as in the hands of the original owner or holder. §332. How negotiable bonds are made non-negotiable. — The owner or holder of any corporate or municipal bond or obligation (except such as are designated to circulate as money, payable to bearer) here- tofore or hereafter issued and payable in this State, but not registered in pursuance of any State law, may make such bond or obligation, or the interest coupon accompanying the same, non-negotiable, by sub- scribing his name to a statement indorsed thereon that such bond, obligation or coupon is his property ; and thereon the principal sum therein mentioned is payable only to such owner or holder, or his legal representatives or assigns, unless such bond, obligation or coupon be transferred by indorsement in blank, or payable to bearer, or to order, with the addition of the assignor's place of residence. DIGEST OF THE FEDERAL BILL OF LADING ACT Its Importance in Interstate and Foreign Commerce — Origin of Federal Bill of Lading Act Considered second only in commercial importance to the Federal Reserve Act is the Federal Bill of Lading Act, otherwise known as the Pomerene Bill, which came into effect the first day of January, 1917. With its passage, bills of lading were transformed from simple con- tracts of shipment into important negotiable instruments, and the con- ditions under which they may be issued, are fully prescribed. Pre- vious to that date, the bill of lading, which is the documentary evidence of the shipment of goods from producer to consumer, afforded no secu- rity of any kind to the banker who advanced money thereon. For a long time prior to the passage of the Pomerene bill, a con- tinued want was felt for legislation which would transform the bill of lading into a negotiable instrument, thereby rendering it capable 4o8 Bank and Trade Acceptances of being transferred in the same manner as a check ©r other com- mercial paper with its attendant advantages to the holder. The vari- ous commercial bodies of the country, principally, the Committee of the American Bankers Association, after an energetic campaign to bring about such legislation, v^rere instrumental in having passed, by various States of the Union, from time to time, what is known as the "Uniform Bill of Lading Act", the purposes of which closely re- semble the Pomerene bill. However, Acts known as the "Uniform Bill of Lading Act" enacted by the Legislatures of such States and adopted in whole or in part by some others, were found to be at variance with the requirements of a fundamentally sound document, and were far from uniform. IMPORTANCE OF BILL OF LADING GREATLY INCREASED BY ACT The Federal Bill of Lading Act, however, brought about a complete change in the bill of lading, which, as a receipt for goods delivered, represents ownership as well, and is the basis of acceptance in bills of exchange, both domestic and foreign. IMPORTANT FEATURES OF THE FEDERAL BILL OF LADING ACT The Federal Bill of Lading Act contains the following important features : 1. Provision is made for a uniform bill of lading. 2. Bills of lading are made easily and safely negotiable. 3. The burden of responsibility is shifted from the bank to the carrier. 4. Fraudulent practices in connection with bills of lading are made criminal and punishment provided therefor. DIGEST OF THE FEDERAL BILL OF LADING ACT A digest of this Act follows : §1. Jurisdiction. — This Act exercises jurisdiction over bills of lading issued by any common carrier for the transportation of goods : (a) Within any territory of the United States or the District of Columbia. Commercial Banking and Credits 4019 (b) From a State to a foreign country. (c) From one State to another State. (d) Between points in the same State through another State or through a foreign country. §§2 and 3. Kinds of bills to be used. — (a) Straight bill. (b) Order bill. A straight bill is one in which it is stated that the goods are con- signed or destined to a specified person. Such bills are non-negotia- ble and must be so marked. An order bill is one in which it is stated that the goods are consigned or destined to the order of any person named. Such bills are always negotiable. Any provision in an order bill to the effect that it is non-negotiable shall be void and shall not affect its negotiability un- less made non-negotiable by the shipper in agreement in writing. §4. Order bills not to be issued in part or sets. — Order bills may not be issued in parts or sets, except in the case of shipments to Alaska and Panama, and if so issued, the carrier will be held liable to anyone who purchases a part for value, in good faith, even though such pur- chase is made after delivery of the goods. The provisions contained in this Section, however, do not forbid the issuance of order bills in parts or sets for the transportation of goods to Alaska, Panama, Por- to Rico, Philippines, Hawaii or other foreign countries. §5. Duplicate necessary when more than one issued. — In the issu- ance of dupHcate order bills for the transportation of goods to anv place in the United States or on the continent of North America, excep^ Alaska, and Panama, the word "duplicate" must be so marked plainly upon their face. §6. Straight bill; how to be marked. — A straight bill shall have plainly upon its face by the carrier issuing it "non-negotiable" or "not negotiable." §7. Effect of insertion of name of person to be notified. — THe inser- tion of the name of a person to be notified of the arrival of thv goods shall not limit the negotiability of order bills. 410 Bank and Trade Acceptances §8. Carrier compelled to make delivery in absence of lawful excuse. — A carrier in the absence of some lawful excuse, is bound to deliver goods upon a demand made by the consignee named in the bill for the goods (straight bill) ; or, if the bill is an order bill, by the holder thereof. In the latter case such a demand should be accompanied by: (a) An offer to satisfy the carrier's lawful lien upon the goods. (b) An offer to surrender the bill properly endorsed. (c) A readiness and willingness to sign an acknowledgment for the delivery of the goods, and in case of the carrier's refusal or failure to deliver the goods in compliance with the demand by the consignee or holder of the bill, the burden of establishing the existence of a lawful excuse shall be upon the carrier. §9. When carrier is justified in making delivery. — A carrier is justi- fied in making delivery to: (a) One who is a person lawfully entitled to the possession of the goods. (b) A consignee named in a straight bill. (c) A person possessing an order bill stating that the goods are to be delivered to his order, or which has been in- dorsed to him or in blank by the consignee. §10. Liability of carrier when delivery made to person not entitled to goods. — That where a carrier delivers goods to one who is not law- fully entitled to the possession of them, the carrier shall be liable to anyone having a right of property or possession in the goods if he delivered the goods otherwise than as authorized by subdivisions (b) and (c) of the preceding section ; and, though he delivered the goods as authorized by either of said subdivisions, he shall be so liable if prior to such delivery he (a) Had been requested, by or on behalf of a person having a right of property or possession in the goods, not to make such delivery, or (b) Had information at the time of the delivery that it was to a person not lawfully entitled to the possession of the goods. Such request or information, to be effective within the meaning of this section, must be given to an officer or agent, of the carrier, the Commercial Banking AND Cf£dits 411 actual or apparent scope of whose duties includes action upon such a request or information, and must be given in time to enable the officer or agent to whom it is given, acting with reasonable diligence, to stop delivery of the goods. §11. Liability of carrier arising out of failure to cancel order bill. — A carrier will be held liable if it fails to cancel an order bill on delivery, except when compelled by legal process, and if such bill is later ac- quired for value and in good faith. §12. Liability of carrier when making partial delivery. — A carrier will be held liable in cases of partial delivery, except when compelled by legal process or failure to take up and cancel the bill or mark the bill with a description of the partial delivery, or if such bill is later ac- quired for value and in good faith. §13. Alterations, additions or erasures. — Any bill which is in any way altered, added to or erased, without authority of the carrier, will be void. §14. When an order bill is lost, stolen or destroyed. — When a bill is lost, stolen or destroyed, a Court of competent jurisdiction may order the delivery of the goods upon satisfactory proof of such loss upon the giving of an indemnifying bond. In such a case the carrier's costs and counsel fees must be paid. Liability of the carrier is not avoided in case such an order bill has been negotiated for value without notice of delivery. §15. Liability of carrier when bill marked "duplicate." — A bill marked "duplicate" makes the carrier liable to the extent only of de- claring that it is a true copy of the original. §18. When carrier is liable for non-delivery. — The carrier will be liable for non-delivery when the title has not been transferred by the consignee to carrier or when the carrier has no lien on the goods. §15. When more than one claims title to goods. — When one or more persons claim title to the goods, the carrier may require all known claimants to interplead either as a defense to an action for non-deliv- ery or as an original suit. 412 Bank and Trade Acceptances « §18. When carrier not liable for non-delivery of goods. — A carrier is not liable for the non-delivery of goods if he has knowledge of some person other than the consignee or holder of the bill, who has a claim, and will be excused from liability for refusing to deliver the goods until he has had a reasonable time to ascertain the validity of the ad- verse claim. §19. Carrier not liable for any other circumstances in non-delivery. — Under no other circumstances than those noted in the preceding sec- tion, can a carrier be held liable for non-delivery. §20. Liability for quantity and quality of shipment. — When goods are loaded by a carrier, it shall count the package freight and ascertain the kind and quantity of bulk freight. Insertions in the bill that it is the shipper's weight, load and count will be held to be void. §21. Liability of carrier in loading. — When goods are loaded by the shipper and the bill states that it is the shipper's weight, load and count, the carrier must ascertain the kind and quantity of goods, and is not liable for the improper loading or the misdescription of goods in the bill of lading. In the case of a carrier having facilities at hand and the shipment being in bulk and requests being made in writing, the shipper's weight, load and count may be verified by the carrier's agent. The shipper's weight shall then not be inserted in the bill. §22. Liability of carrier when bill is issued by authorized agent. — When a bill is issued by an agent of actual or apparent authority, the carrier is liable to the owner of the goods covered in a straight bill or to the bona fide holder for value of an order bill, although the goods are not received by the carrier or are misdirected. §23. Rights of debtors and creditors. — While goods are in posses- sion of a carrier, they may not be attached by garnishment or other- wise unless a bill is first surrendered to the carrier or its negotiation is enjoined. §24. When creditor is entitled to aid of courts against debtor. — A creditor, whose debtor is the owner of an order bill, shall be entitled to the aids of Courts of jurisdiction in attaching such bill. Commercial Banking and Cpedits 413 §25, When lien on goods for payment of freight arises. — When an order bill is issued, a carrier has a lien on the goods for all transpor- tation and delivery charges. §26. When carrier not liable for non-delivery. — A carrier will not be held liable for non-delivery after the goods have been lawfully sold to satisfy the carrier's lien, and when goods have not been claimed or when goods are perishable or hazardous. §§27, 28, 29 and 30. Negotiation and transfer of bills.— A bill may be negotiated : 1. By the delivery to an indorsee of an order bill, the indorse- ment of an order bill in such case being required to be made by a person to whose order the goods are deliverable. 2. Such indorsement may be in blank or to a specified person and subsequent indorsements must be in like manner. 3. The transference of bills may be accompanied with an ex- press or implied agreement to transfer the title to the bill or to the goods represented thereby. A straight bill, how- ever, cannot be negotiated free from existing equities. 4. An order bill may be negotiated by any person possessing same, if the bill requires the carrier to deliver goods to the order of such person or is in such form that it may be nego- tiated by delivery. §§31 and 32. Rights under transfer and negotiation. — These Sec- tions regulate the rights of persons and parties under transfer and negotiation of bills. A person to whom a bill has been negotiated ac- quires thereby such a title to the goods as the person negotiating the bill had or the consignee and consignor had. A person to whom a bill has been transferred but not negotiated acquires as against the transferor the title to the goods, and if it is a straight bill, such per- son has a right to notify the carrier and becomes direct obligee of the carrier's obligations. A transfer of the bill may be defeated by gar- nishment proceedings by a creditor by prior notification of the carrier, the notification being required to be made to a proper agent of the carrier and within a reasonable time. §33. Where order bill is transferred for value by delivery. — Where an order bill is transferred for value by delivery, the transferee ac- quires a right against a transferor to compel him to indorse the bill, when such is essential for negotiation. 414 Bank and Trade Acceptances §§34, 35 and 36. Liability of person who negotiates or transfers a bill. — A person negotiating or transferring bills by indorsement, war- rants that the bill is genuine ; that he has a legal right to transfer it ; that he knows of no fact which might impair the validity or worth of the bill, and that he has a right to transfer the title to the goods. The indorser of the bill is not liable for the obligations of prior indorsers or the carrier. A mortgagee, pledgee or holder demanding payment of a debt does not thereby warrant the genuineness of such bill held as security, or quantity or quality of goods. §§37, 38, 39 and 40. Rights of holders of bills.— The validity of title is not impaired when received in good fatih, for value, even though negotiation was a breach of duty, or in the case of the owner having been deprived of such bill by fraud, accident, mistake, duress, loss, theft or conversion. Negotiation in the case of a person who has sold, mortgaged or pledged goods which are in the carrier's possession or who has sold, mortgaged, or pledged the order bill, but continued in possession of same, is not considered to have been effected from the first purchaser to the last holder. The rights of a purchaser of an order bill in good faith and for value, to whom such bill has been negotiated, shall not be defeated by the seller's lien or right of stoppage in transitu, whether such negotiation be prior or subsequent to notification to the carrier of the seller's claim. The carrier shall not be obliged to deliver goods to an unpaid seller unless the bill is first surrendered for cancellation. Except as above noted, no right of a mortgagee or lien holder is limited as against a purchaser of a bill for value and in good faith. §41. Forgeries, etc. — Forgeries are to be adjudged misdemeanors punishable by imprisonment not exceeding five years or by fine not exceeding five thousand dollars or both, where a person with intent to defraud, falsely makes, alters, forges, counterfeits, prints or photo- graphs any bill of lading or publishes as genuine any such forged bill or aids in its forging. §42. Definitions. — Section 42 defines the following: "Action" includes counterclaim, set off and suit in equity. "Bill" means bill of lading governed by this Act. "Consignee" means the person named in the bill as the person to whom delivery of the goods is to be made. Commercial Banking and Cpedits 415 "Consignor" means the person named in the bill as the person from whom the goods have been received for shipment. "Goods" means merchandise or chattels in course of transporta- tion or which have been or are about to be transported. "Holder of a bill" means a person who has both actual posses- sion of such bill and a right to property therein. "Order" means an order by indorsement on the bill. "Person" includes a corporation or partnership or two or more persons having a joint or common interest. "To purchase" includes to take as mortgagee and to take as pledgee. "State" includes any territory, district, insular possession or isthmian possession. §§43 and 44. Effectiveness of Act. — The provisions of this Act do not apply to bills made and delivered prior to the taking effect thereof, and such section and part of this Act is independent and severable, whereby one part, if declared void, does not invalidate the remainder of the Act. §45. Takes effect January 1st, 1917. — This Section prescribes that this Act shall take effect on January 1st, 1917. UNITED STATES WAREHOUSE ACT The United States Warehouse Act and its Importance to the Bank Acceptance The United States Warehouse Act is given here in full as a refer- ence aid to the treatise on Acceptances. Since Bank Acceptances se- cured by warehouse receipts covering staple commodities, are one of the three eligible for rediscount, a study of the Act and the provisions which have greatly improved the financial standing of warehouse re- ceipts, is recommended. Features of the United States Warehouse Act The new United States Warehouse Law, approved Aug. 11, 1916, provides for the issuance of licenses by the Secretary of Agriculture, for the operation of warehouses for the storage of agricultural prod- ucts. The license brings the operation of the warehouse for which it is issued under an inspection service to be maintained by the Depart- 4^6 Bank and Trade Acceptances ment of Agriculture, and makes it incumbent for the licensee to give a bond in a sum fixed by the Secretary of Agriculture for the faith- ful discharge of his obligations to the owners of commodities placed in his custody. The inspection service includes an examination of the v^arehouse before the license is issued, and from time to time, to determine whether it is suitable for the purpose, and the practice and competency of the warehouseman in classifying according to grade and otherwise, weighing and certification of products, etc. The bond is a guaranty of faithful observance of State as well as Federal laws governing warehouse operations. An appropriation of $50,000 is made to defray the expenses of the Department of Agriculture in connection with this service for one year. UNITED STATES WAREHOUSE ACT §1. Short title. — That this Act shall be known by the short title of "United States Warehouse Act." §2. Definitions of terms used in Act. — That the term "warehouse" as used in this Act shall be deemed to mean every building, structure, or other protected inclosure in which any agricultural product is or may be stored for interstate or foreign commerce, or, if located within any place under the exclusive jurisdiction of the United States, in which any agricultural product is or may be stored. The term "ag- ricultural product" wherever used in this Act shall be deemed to mean cotton, wool, grains, tobacco, and flaxseed, or any of them. As used in this Act, "person" includes a corporation or partnership or two or more persons having a joint or common interest; "warehouseman" means a person lawfully engaged in the business of storing agricultural products ; and "receipt" means a warehouse receipt. §3. Powers of Secretary of Agriculture under Act. — That the Secre- tary of Agriculture is authorized to investigate the storage, warehous- ing, classifying according to grade and otherwise, weighing, and cer- tification of agricultural products; upon application to him by any person applying for license to conduct a warehouse under this Act, to inspect such warehouse or cause it to be inspected ; at any time, with or without application to him, to inspect or cause to be inspected all warehouses licensed under this Act; to determine whether ware- houses for which licenses are applied for or have been issued under Commercial Banking and Cfedits 417 this Act are suitable for the proper storage of any agricultural product or products ; to classify warehouses licensed or applying for a license in accordance with their ownership, location, surroundings, capacity, conditions, and other qualities, and as to the kinds of licenses issued or that may be issued for them pursuant to this Act; and to prescribe, within the limitations of this Act, the duties of the warehousemen conducting warehouses licensed under this Act with respect to their care of and responsibility for agricultural products stored therein. §4. Issuance of license by the Secretary of Agriculture. — That the Secretary of Agriculture is authorized, upon application to him, to issue to any warehouseman a license for the conduct of a warehouse or warehouses in accordance with this Act and such rules and regulations as may be made hereunder; PROVIDED, That each such warehouse be found suitable for the proper storage of the particular agricultural product or products for which a license is applied for, and that such warehouseman agree, as a condition to the granting of the license, to comply with and abide by all the terms of this Act and the rules and regulations prescribed hereunder. §5. Period of issuance of license. — That each license issued under sections four and nine of this Act shall be issued for a period not ex- ceeding one year and shall specify the date upon which it is to ter- minate, and upon showing satisfactory to the Secretary of Agriculture, may from time to time be renewed or extended by a written instru- ment, which shall specify the date of its termination. §6. Warehouseman required to file bond to secure faithful perform- ance of his obligations. — That each warehouseman applying for a li- cense to conduct a warehouse in accordance with this Act, shall, as a condition to the granting thereof, execute and file with the Secretary of Agriculture a good and sufficient bond other than personal secu- rity to the United States to secure the faithful performance of his ob- ligations as a warehouseman under the laws of the State, District, or Territory in which he is conducting such warehouse, as well as under the terms of this Act and the rules and regulations prescrbied here- under, and of such additional obligations as a warehouseman as may be assumed by him under contracts with the respective depositors of agricultural products in such warehouse. Said bond shall be in such form and amount, shall have such surety or sureties, subject to service 4i8 Bank and Trade Acceptances of process in suits on the bond within the State, District, or Terri- tory in which the warehouse is located, and shall contain such terms and conditions as the Secretary of Agriculture may prescribe to carry out the purposes of this Act, including the requirements of fire insur- ance. Whenever the Secretary of Agriculture shall determine that a bond approved by him is, or for any cause has become, insufficient, he may require an additional bond or bonds to be given by the ware- houseman concerned, conforming with the requirements of this sec- tion, and unless the same be given within the time fixed by a written demand therefor, the license of such warehouseman may be suspended or revoked. §7. Person injured by breach of any obligation may sue on the bond. — That any person injured by the breach of any obligation to secure which a bond is given, under the provisions of sections six or nine, shall be entitled to sue on the bond in his own name in any court of competent jurisdiction to recover the damages he may have sustain- ed by such breach. §8. When warehouse is bonded. — That upon the filing with and approval by the Secretary of Agriculture of a bond, in compliance with this Act, for the conduct of a warehouse, such warehouse shall be designated as bonded hereunder; but no warehouse shall be desig- nated as bonded under this Act, and no name or description conveying the impression that it is so bonded, shall be used, until a bond, such as provided for in section six, has been filed with and approved by the Secretary of xA.griculture, nor unless the license issued under this Act for the conduct of such warehouse remains unsuspended and unre- voked. §9. When license may be issued to person not warehouseman, — That the Secretary of Agriculture may, under such rules and regulations as he shall prescribe, issue a license to any person not a warehouse- man to accept the custody of agricultural products and to store the same in a warehouse or warehouses owned, operated, or leased by any State, upon condition that such person agree to comply with and abide by the terms of this Act and the rules and regulations prescribed here- under. Each person so licensed shall issue receipts for the agricul- tural products placed in his custody, and shall give bond, in accord- ance with the provisions of this Act and the rules and regulations here- Commercial Banking and Cpedits 419 under affecting warehousemen licensed under this Act, and shall other- wise be subject to this Act and such rules and regulations to the same extent as is provided for warehousemen licensed hereunder. §10. Reasonable fees to be charged by Secretary of Agriculture. — That the Secretary of Agriculture shall charge, assess, and cause to be collected a reasonable fee for every examination or inspection of a warehouse under this Act when such examination or inspection is made upon application of a warehouseman, and a fee not exceeding $2 per annum for each license or renewal thereof issued to a ware- houseman under this Act. All such fees shall be deposited and cov- ered into the Treasury as miscellaneous receipts. §11. When person may be licensed for what purposes. — That the Secretary of Agriculture may, upon presentation of satisfactory proof of competency, issue to any person a license to classify any agricul- tural product or products, stored or to be stored in a warehouse li- censed under this Act, according to grade or otherwise and to certifi- cate the grade or other class thereof, or to weigh the same and certifi- cate the weight thereof, or both to classify and weigh the same and to certificate the grade or other class and the weight thereof, upon con- dition that such person agree to comply with and abide by the terms of this Act and of the rules and regulations prescribed hereunder so far as the same relate to him. §12. May suspend such license if person misapplies authority. — That any license issued to any person to classify or to weigh any agri- cultural product or products under this Act may be suspended or re- voked by the Secretary of Agriculture whenever he is satisfied, after opportunity afforded to the licensee concerned for a hearing, that suc]i licensee has failed to classify or to weigh any agricultural product or products correctly, or has violated any of the provisions of this Act or of the rules and regulations prescribed hereunder, so far as the same may relate to him, or that he has used his license or allowed it to be used for any improper purpose whatsoever. Pending investigation, the Secretary of Agriculture, whenever he deems necessary, may suspend a license temporarily without hearing. §13. Receipt of products for storage. — That every warehouseman conducting a warehouse licensed under this Act shall receive for stor- 420 Bank and Trade Acceptances age therein, so far as its capacity permits, any agricultural product of the kind customarily stored therein by him which may be tendered to him in a suitable condition for warehousing, in the usual manner in the ordinary and usual course of business, without making any dis- crimination between persons desiring to avail themselves of ware- house facilities. §14. Person depositing does so under terms of this Act. — That any person who deposits agricultural products for storage in a warehouse licensed under this Act shall be deemed to have deposited the same subject to the terms of this Act and the rules and regulations pre- scribed hereunder. §15. Inspecting and grading of grains, flaxseed, etc. — That grain, flaxseed, or any other fungible agricultural product stored for inter- state or foreign commerce, or in any place under the exclusive juris- diction of the United States, in a warehouse licensed under this Act shall be inspected and graded by a person duly licensed to grade the same under this Act. §16. Segregation of stored products to permit identification, etc. — That every warehouseman conducting a warehouse licensed under this Act shall keep the agricultural products therein of one depositor so far separate from agricultural products of other depositors, and from other agricultural products of the same depositor for which a separate receipt has been issued, as to permit at all times the identification and redelivery of the agricultural products deposited ; but if authorized by agreement or by custom, a warehouseman may mingle fungible ag- ricultural products with other agricultural products of the same kind and grade, and shall be severally liable to each depositor for the care and redelivery of his share of such mass, to the same extent and under the same circumstances as if the agricultural products had been kept separate, but he shall at no time, while they are in his custody mix fungible agricultural products of different grades. §17. Warehouseman required to issue receipts for products stored. — That for all agricultural products stored for interstate or foreign com- merce, or in any place under the exclusive jurisdiction of the United States, in a warehouse licensed under this Act, original receipts shall be issued by the warehouseman conducting the same, but no receipts Commercial Banking and Cpedits 421 shall be issued except for agricultural products actually stored in the warehouse at the time of the issuance thereof. §18. What receipt should embody. — That every receipt issued for agricultural products stored in a warehouse licensed under this Act shall embody within its written or printed terms (a) the location of the warehouse in which the agricultural products are stored ; (b) the date of issue of the receipt ; (c) the consecutive number of the receipt; (d) a statement whether the agricultural products received will be delivered to the bearer, to a specified person, or to a specified person or his order; (e) the rate of storage charges; (f) a description of the agricultural products received, showing the quantity thereof, or, in case of agricultural products customarily put up in bales or pack- ages, a description of such bales or packages by marks, numbers, or other means of identification and the weight of such bales or packages ; (g) the grade or other class of the agricultural products received and the standard or description in accordance with which such classification has been made: PROVIDED, That such grade or other class shall be stated according to the official standard of the United States applicable to such agricultural products as the same may be fixed and promul- gated under authority of law: PROVIDED FURTHER, That until such official standards of the United States for any agricultural product or products have been fixed and promulgated, the grade or other class thereof may be stated in accordance with any recognized standard or in accordance with such rules and regulations not incon- sistent herewith as may be prescribed by the Secretary of Agriculture ; (h) a statement that the receipt is issued subject to the United States Warehouse Act and the rules and regulations prescribed thereunder ; (i) if the receipt be issued for agricultural products of which the ware- houseman is owner, either solely or jointly or in common with others, the fact of such ownership ; (j) a statement of the amount of advances made and of liabilities incurred for which the warehouseman claims a lien: PROVIDED, That if the precise amount of such advances made or of such liabilities incurred be at the time of the issue of the receipt unknown to the warehouseman or his agent who issues it. a statement of the fact that advances have been made or liabilities in- curred and the purpose thereof shall be sufficient; (k) such other terms and conditions within the limitations of this Act as may be re- quired by the Secretary of Agriculture; and (1) the signature of the warehouseman, which may be made by his authoricd agent: PRO- 422 Bank and Trade Acceptances V^IDED, That unless otherwise required by the law of the State in which the warehouse is located, when requested by the depositor of other than fungible agricultural products, a receipt omitting compli- ance with subdivision (g) of this section may be issued if it have plainly and conspicuously embodied in its written or printed terms a provision that such receipt is not negotiable. §19. Secretary of Agriculture to promulgate standards. — That the Secretary of Agriculture is authorized, from time to time, to establish and promulgate standards for agricultural products in this Act defined by which their quality or value may be judged or determined: PRO- VIDED, That the standards for any agricultural products which have been, or which in future may be, established by or under authority of any other Act of Congress shall be, and are hereby, adopted for the purposes of this Act as the official standards of the United States for the agricultural products to which they relate. §20. While an original receipt is outstanding no further receipt shall be issued. — That while an original receipt issued under this Act is outstanding and uncanceled by the warehouseman issuing the same no other or further receipt shall be issued for the agricultural product covered thereby or for any part thereof, except that in the case of a lost or destroyed receipt, a new receipt, upon the same terms and sub- ject to the same conditions and bearing on its face the number and date of the receipt in lieu of which it is issued, may be issued upon the compliance with the statutes of the United States applicable thereto in places under the exclusive jurisdiction of the United States or upon compliance with the laws of any State applicable thereto in any place not under the exclusive jurisdiction of the United States: PROVIDED, That if there be in such case no statute of the United States or law of a State applicable thereto such new receipts may be issued upon the giving of satisfactory security in compliance with the rules and regulations made pursuant to this Act. §21. Delivery. — That a warehouseman conducting a warehouse li- censed under this Act, in the absence of some lawful excuse, shall, without unnecessary delay, deliver the agricultural products stored therein upon a demand made either by the holder of a receipt for such agricultural products or by the depositor thereof if such demand be accompanied with (a) an ofTer to satisfy the warehouseman's lien ; Commercial Banking and Cp£dits 423 (b) an offer to surrender the receipt, if negotiable, with such in- dorsements as would be necessary for the negotiation of the receipt ; and (c) a readiness and willingness to sign, when the products are delivered, an acknowledgment that they have been delivered if such signature is requested by the warehouseman. §22. Warehouseman shall cancel each receipt returned. — That a warehouseman conducting a warehouse licensed under this Act shall plainly cancel upon the face thereof each receipt returned to him upon the delivery by him of the agricultural products for which the receipt was issued. §23. Warehouseman required to keep records and make reports. — That every warehouseman conducting a warehouse licensed under this Act shall keep in a place of safety complete and correct records of all agricultural products stored therein and withdrawn therefrom, of all warehouse receipts issued by him, and of the receipts returned to and canceled by him, shall make reports to the Secretary of Agriculture concerning such warehouse and the condition, contents, operation, and business thereof in such form and at such times as he may require, and shall conduct said warehouse in all other respects in compliance with this Act and the rules and regulations made hereunder. §24. Business regulated by Secretary of Agriculture. — That the Sec- retary of Agriculture is authorized to cause examinations to be made of any agricultural product stored in any warehouse licensed under this Act. Whenever, after opportunity for hearing is given to the warehouseman conducting such warehouse, it is determined that he is not performing fully the duties imposed on him by this Act and the rules and regulations made hereunder, the Secretary may publish his findings. §25. Revocation of license after hearing and suspension. — That the Secretary of Agriculture may, after opportunity for hearing has been afforded to the licensee concerned, suspend or revoke any license issued to any warehouseman conducting a warehouse under this Act, for any violation of or failure to comply with any provision of this Act or of the rules and regulations made hereunder or upon the ground that unreasonable or exorbitant charges have been made for services rendered. Pending investigation, the Secretary of Agriculture, when- ever he deems necessary, may suspend a license temporarily without hearing. 424 Bank and Trade Acceptances §26. Publication of results of investigation. — That the Secretary of Agriculture from time to time may publish the results of any inves- tigations made under section three of this Act; and he shall publish the names and locations of warehouses licensed and bonded and the names and addresses of persons licensed under this Act and lists of all licenses terminated under this Act and the causes therefor. §27. Examination of books, records, etc. — That the Secretary of Agriculture is authorized through officials, employees or agents of the Department of Agriculture designated by him to examine all books, records, papers, and accounts of warehouses licensed under this Act and of the warehousemen conducting such warehouses relating thereto. §28. Make rules and regulations necessary. — That the Secretary of Agriculture shall from time to time make such rules and regulations as he may deem necessary for the efficient execution of the provisions of this Act. §29. This act not to be construed to conflict with, impair or limit State laws. — That nothing in this Act shall be construed to conflict with, or to authorize any conflict with, or in any way to impair or limit the effect or operation of the laws of any State relating to ware- houses, warehousemen, weighers, graders, or classifiers ; but the Sec- retary of Agriculture is authorized to cooperate with such officials as are charged with the enforcement of such State laws in such States and through such cooperation to secure the enforcement of the provi- sions of this Act ; nor shall this Act be construed so as to limit the operation of any statute of the United States relating to warehouses or warehousemen, weighers, graders, or classifiers now in force in the District of Columbia or in any Territory or other place under the ex- clusive jurisdiction of the United States. §30. Punishment provided for misdemeanors. — That every person who shall forge, alter, counterfeit, simulate, or falsely represent, or shall without proper authority use, any license issued by the Secre- tary of Agriculture under this Act, or who shall violate or fail to comply with any provision of section eight of this Act, or who shall issue or utter a false or fraudulent receipt or certificate, shall be deemed guilty of a misdemeanor, and upon conviction thereof shall be Commercial Banking and Cp£dits 425 fined not more than $500 or imprisoned not more than six months, or both, in the discretion of the court. §31. Appropriation. — That there is hereby appropriated, out of any money in the Treasury not otherwise appropriated, the sum of $50,- 000, available until expended, for the expenses of carrying into effect the provisions of this Act, including the payment of such rent and the employment of such persons and means as the Secretary of Agricul- ture may deem necessary in the City of Washington and elsewhere, and he is authorized, in his discretion, to employ qualified persons not regularly in the service of the United States for temporary assistance in carrying out the purposes of this Act, and out of the moneys appro- priated by this Act to pay the salaries and expenses thereof. §32. Effect of invalidity of part of Act. — That if any clause, sen- tence, paragraph, or part of this Act shall, for any reason, be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remainder thereof, but shall be confined in its operation to the clause, sentence, paragraph, or part thereof directly involved in the controversy in which such judgment shall have been rendered. §33. That the right to amend, alter, or repeal this Act is hereby ex- pressly reserved. STAMP TAXES TAXATION OF CHECKS, ACCEPTANCES, DRAFTS AND PROMISSORY NOTES Taxation of Negotiable Instruments; Checks, Drafts, Promissory Notes, and Acceptances Trade and Bank Acceptances, being in the same class as other nego- tiable instruments, are subject to the same laws pertaining to stamp taxes as are checks, drafts and promissory notes. Classes of Negotiable Instruments Taxable By the Federal Revenue Act of 1918, in effect April 1, 1919, there is imposed a tax on such negotiable instruments as above mentioned, 4^6 Bank and Trade Acceptances payable otherwise than at sight or on demand, upon their acceptance or delivery within the United States, whichever is prior, and on prom- issory notes, except those given below as exempt, and on each renewal of the same, — 2 cents on each $100. or fractional part thereof. Amounts not exceeding $100. are taxable to the extent of 2 cents. The "United States" as given in this law, includes the District of Columbia, Hawaii and Alaska. Text of Law The text of the law as relates to such taxation follows : — Drafts or checks (payable otherwise than at sight or on demand), upon their acceptance or delivery within the United States, which- ever is prior, promissory notes, except bank notes issued for circula- tion, and for each renewal of the same, for an amount not exceeding $100. are taxed 2 cents, and for each additional $100. or fractional part thereof, 2 cents. Analysis of Negotiable Instruments taxable Included amongst the taxable instruments payable otherwise than at sight or on demand are the following: 1. Trade Acceptances. 2. Bankers' Acceptances. 3. Time drafts which are drawn on a domestic bank to secure money to be used in purchasing goods for exportation. 4. Time drafts which are drawn against the proceeds of time drafts directly covering exports to a foreign country, and which constitute an inherent, necessary and bona fide part of the actual process of exportation. 5. Drafts which state no time for payment, but which are ac- cepted payable on a certain future date. 6. Time drafts which cover articles shipped from the United States, Alaska and Hawaii to the Canal Zone, if such drafts are delivered within the United States, Alaska or Hawaii. 7. Time drafts which do not cover exports, drawn and delivered or accepted in the United States and payable in foreign countries. 8. Post-dated checks which are expressly payable after their date. 9. Time drafts which are drawn against shipments from the Philippines, Virgin Islands, and Porto Rico into the United States, if delivery or acceptance of such drafts first takes place within the United States, Hawaii or Alaska. Commercial Banking and Credits 427 When and where Negotiable Instruments Exempt from Taxation The following checks and drafts are exempt from taxation under this law : 1. All checks and drafts drawn on demand. 2. Post-dated checks which are not expressly payable after their date. 3. Drafts which are drawn abroad on a foreign drawee with a foreign payee and pass through a bank in the United States in the course of collection, unless delivered by an agent of the drawer to an agent of the payee within the United States. 4. Time drafts which are drawn on domestic banks against ex- port shipments delivered to the first carrier for transporta- tion, covering the period of transit from the interior point to the seaboard. 5. Time drafts which cover shipments to the Philippines, the Virgin Islands and Porto Rico. 6. Time drafts which directly cover exports to a foreign coun- try, and constitute an inherent, necessary and bona fide part of the actual process of exportation. Promissory Notes Included ; When and Where Taxable Promissory notes as outlined in the following, and renewals of same, are also negotiable instruments upon which a tax is imposed : 1. Notes which are given for security only. 2. Notes which are payable on demand or after date. 3. Promissory notes which are secured by bonds of the War Finance Corporation. 4. Promissory notes which accompany mortgages of joint-stock land banks. 5. Instruments which are in the form of promissory notes, rep- resenting the interest upon promissory notes, not inckided in (5) below, and either separate from or prepared in a form and for the purpose of being separated from the principal note. 6. Promissory notes which are executed and mailed in the United States to a payee in Canada. 7. Extensions or renewals of promissory notes whicli are brought about by extensions of mortgages by which such notes are secured. 8. Policy loan and premium extension agreements which con- tain an unqualified promise to pay a specified sum of money 4^8 Bank and Trade Acceptances at a certain date, excepting where the only remedy of the payee is to reduce or cancel the rights of the insured in case of non-payment of the premiums or loans. Promissory Notes ; when and where exempt from Taxation The following promissory notes are exempt from taxation : 1. Certificates of deposit. 3. Bank notes which are issued for circulation. 3. Promissory notes which are issued directly by foreign gov- ernments and which are placed in this country for sale. 4. Promissory notes which are executed and mailed in Canada to a payee within the United States. 5. Coupons attached to a principal obligation which are sub- stantially repetitions of the promise to pay interest con- tained in the principal obligation. 6. Promissory notes which are secured by certificates of indebt- edness issued by the Director General of Railroads. 7. Promissory notes which are secured by United States bonds or obligations issued after April 24, 1917, or secured by the pledge of a promissory note which itself is secured by the pledge of such bonds or obligations. Such bonds must have a par value of not less than the amount of such notes to exempt the latter. Government and Municipal Obligations Exempted Instruments exempt. — There shall not be taxed under this title any bond, note or other instrument, issued by the United States, or by any foreign Government, or by any State, Territory, or the District of Columbia, or local subdivision thereof, or municipal or other corpora- tion exercising the taxing power. Penalty for failure to comply. — Whoever makes, signs, issues or ac- cepts, or causes to be made, signed, issued or accepted, any instru- ment, document, or paper of any kind or description whatsoever with- out the full amount of tax thereon being duly paid ; Makes use of any adhesive stamp to denote any tax imposed by this title without canceling or obliterating such stamp as prescribed be- low; Is guilty of a misdemeanor and upon conviction thereof shall pay a fine of not more than $100. for each offense. Commercial Banking and Cpedits 429 Whoever fraudulently cuts, tears, or removes from any vellum, parchment, paper, instrument, writing, package, or article, upon which any tax is imposed by this title, any adhesive stamp or the impression of any stamp, die, plate or other article provided, made, or used in pursuance of this title; Fraudulently uses, joins, fixes, or places to, with, or upon any vellum, parchment, paper, instrument, writing, package, or article, upon which any tax is imposed by this title, (1) any adhesive stamp, or the im- pression of any stamp, die, plate, or other article, which has been cut, torn or removed from any other vellum, parchment, paper, in- strument, writing, package, or article, upon which any tax is imposed by this title ; or (2) any adhesive stamp or the impression of any stamp, die, plate, or other article of insufficient value ; or (3) any forged or counterfeit stamp, or the impression of any forged or coun- terfeit stamp, die, plate or other article ; Wilfully removes, or alters the cancellation, or defacing marks of, or otherwise prepares, any adhesive stamp, with intent to use, or cause the same to be used, after it has been already used, or knowingly or wilfully buys, sells, offers for sale, or gives away, any such washed or restored stamp to any person for use, or knowingly uses the same ; Knowingly and without lawful excuse (the burden of proof of such excuse being on the accused) has in possession any washed, restored, or altered stamp, which has been removed from any vellum, parch- ment, paper, instrument, writing, package, or article ; Is guilty of a misdemeanor, and upon conviction shall be punished by a fine of not more than $1,000. or by imprisonment for not more than five years, or both, and any such reused, canceled, or counter- feit stamp and the vellum, parchment, document, paper, package, or article upon which it is placed or impressed shall be forfeited to the United States. Cancellation. — That whenever an adhesive stamp is used for denot- ing any tax imposed by this title, except as hereinafter provided, the person using or affixing the same shall write or stamp or cause to be written or stamped thereupon the initials of his or her name and the date upon which the same is attached or used, so that the same may not again be used: PROVIDED, That the Commissioner may pre- scribe such other method for the cancellation of such stamps as he may deem expedient. Cancellation may be effected also with a machine or punch, but must 430 Bank and Trade Acceptances not so deface the stamp as to prevent its denomination and genui- ness from being readily determined. Use of cancelled stamps — refunds. — A stamp once having been af- fixed to an instrument and cancelled cannot lawfully be removed and attached to another instrument. Refund will be made by the collec- tor of internal revenue for amounts paid for stamps used in excess of requirements, or on instruments not actually eflfective and for which a substitute is prepared and stamped, or on instruments not subject to tax. X,iability to tax. — The liability to tax and the amount thereof, is de- ""termiued by the form and face of a check or draft and cannot be af- fected by proof of facts or circumstances outside of the instrument. Payment for the stamp is a matter for adjustment between the par- ties, but the obligation rests upon the drawee, payee, or indorsee of a draft to see that the tax is paid before or at the time of acceptance or delivery, and both parties to a promissory note are responsible for affixing and cancelling stamps in the required amount. FOREIGN FINANCING UNDER THE EDGE ACT LAWS AND SYNOPSIS FOREIGN FINANCING UNDER THE EDGE ACT Since the termination of the great war, our international commerce, which had been built up at a tremendous cost, has been threatened by new conditions seriously affecting its progress. The danger confronting the United States in its foreign trade may be attributed to the following reasons : During the past year, a very serious situation has arisen in connection with the exchange rates on foreign countries. The pound sterling, the mark, the franc, the lire, and other European currencies have declined in value con- siderably, correspondingly raising the value of the American dollar in foreign countries. This has made it almost impossible for Euro- peans to buy American goods. A more serious problem has presented itself in connection with the credit requirements of European nations, — long terms credits, — which the American exporter and banker have found it very difficult to extend. Prior to the adoption of the Federal Reserve System in the United States, the greater part of our foreign trade was carried on by the larger English banking houses and by some strong and internationally established private banking establishments in New York and in England, which had foreign branches throughout the world. The smaller institutions of the country could extend assistance to the American foreign trade merchant only to a very limited extent. As far back as 1913, steps were taken to procure for the merchant of this country a larger participation in foreign trade and commerce. The Federal Reserve Act provided, among other things, that any na- tional banking association having a capital and surplus of at least one million dollars, migiit, upon securing the approval of the Federal Reserve Board, establish branches in foreign countries and dependen- cies of the United States. In 1916, an Amendment was passed to the Federal Reserve Act per- mitting national banks having a capital and surplus of at least one million dollars to cooperate in the establishment or ownership of American banks or corporations principally engaged in foreign bank- ing, by investing to an amount not to exceed ten percentum of their 433 434 Bank and Trade Acceptances capital and surplus in such institutions "chartered or incorporated un- der the laws of the United States or of any State thereof." Under the Amendment to the Federal Reserve Act, so passed, cer- tain banking institutions were instrumental in organizing banking corporations of the kind contemplated by the Amendment, mainly for the purpose of financing American exporters and importers. However, they could extend their help only to a limited degree and fre- quent appeals were made for Federal incorporation, which, it was be- lieved, would greatly lower the risk in putting out capital in foreign branches. As a consequence, new legislation was called for. The national banks of the country, moreover, felt the need of Federal legis- lation which would entitle them to the benefits and protection of a Federal charter, enabling them to compete for business in foreign countries upon a larger ^and more profitable scale. On September 17, 1919, the McLean Bill became a law, under the provisions of which, national banks, without regard to the amount of their capital and surplus, are permitted to subscribe in amounts not in excess of five percentum of their capital and surplus, to the capital of corporations of the kind contemplated by the Edge Act, thus en- abling national banks to further contribute to the financing of our foreign trade. The Edge Act had its introduction into the United States Senate on July 15th, 1919, and became a law on December 24th, of that year. By the passage of the Edge Act, supplementing the Amendments to the Federal Reserve Act and the McLean Act, providing for participa- tion by national banks in the organization of corporations principally engaged in foreign banking and financing, it is hoped that much of our great foreign trade can be retained to the benefit of American manufacturers and producers. The Act provides for the Federal incorporation and regulation of banking institutions for the purpose of engaging in foreign banking or other foreign financial operations or for engaging in such operations in a dependency or insular possession of the United States, either directly or through the agency, ownership or control of local institu- tions in such places. Briefly described, the Act distinguishes between two classes of cor- porations — one class doing principally a banking business, the other an investment business, taking long time paper, including bonds and mortgages and issuing their own debentures against them. As to the first class, those corporations carrying on a banking busi- Commercial Banking and Credits 435 ness may conduct every nature of financial operation with the excep- tion of receiving deposits in the United States, except such as may be incidental to or for the purpose of carrying out transactions abroad. Both classes of corporations are prohibited from carrying on any part of their business activities in the United States, except such as, in the opinion of the Federal Reserve Board, may be incidental to their foreign or international business. They may not become members of the Federal Reserve System and are not authorized to invest in any corporation other than a banking corporation an amount in excess of ten percentum of their own capital and surplus without the approval of the Federal Reserve Board. The procedure contemplated under the Edge Act for foreign financ- ing, is one by w^hich a party sells merchandise to a second party who is penniless and yet obtains actual money in the transaction. The Amer- ican exporter or manufacturer may sell his goods to an impoverished foreign purchaser — a foreign government or a private concern. Corporations organized under the Edge Act may accept collateral from the purchaser such as is acceptable to the Federal Reserve Board, and against this may issue debentures to be sold to investors, the proceeds of which sale will be paid to the American seller. The Act is very extensive in its operations, and powers are granted to these corporations permitting them to accept even mortgages on the plants or other real property of the purchasers. A foreign concern in need of raw material may obtain it by giving a mortgage on its plant, and eventually, by turning this raw mate- rial into finished products, will be enabled to redeem its collateral and to put aside a little profit besides. While it is true that some of the leading banking institutions of the country have rendered a noticeable service to the commerce of the nation in the form of short term credits, their liabilities are, however, limited. Long term credits, that is, for periods beyond ninety days, are made possible by the Edge Act. For example, a corporation lo- cated in Belgium is desirous of purchasing American machinery for the rebuilding of its factories. The transaction called for is on the basis of "credit extension" to the Belgium firm, which may have given, as security for the purchase pri^c, corporate bonds maturing eight or ten years hence. Even though this security is acceptable as re- gards safety to the American manufacturer, he is still unable to extend such long term credit and is unable to carry the bonds until maturity, because this would result in a tie-up of his capital. The seller, there- 43^ Bank and Trade Acceptances fore, would be compelled to lose the sale unless the bonds can be quickly converted into cash. The Edge Act for foreign financing would come in as of direct as- sistance. The American manufacturer could then arrange with a cor- poration organized under the Act to take such foreign securities, ad- vance the cash, and within such limitations as the law and the Fed- eral Reserve Board prescribe, issue its own notes, which could then be offered to the public for investment. The result of this roundabout financing is that the purchaser at once receives the purchase price and the European buyer the goods. The credit is passed to the American investor. The Edge Act, therefore, provides for the organization of corpora- tions given the right to engage in international and foreign banking, and in which national banks may participate to a limited extent, there- by affording a means of making available quick and large capital for the purpose of extending credit to Europe. It provides for a well regulated system of financing our foreign trade, whereby such collateral as foreign purchasers possess may be taken in payment of American goods. While it is true that State institutions have been important factors in the financing of American foreign trade until the present, still the corporations which may be or- ganized under the Edge Act will come as an additional inducement of- fering the assistance of the American investor and banker on a much wider scale than heretofore possible. Following is given the text and of the Edge Act in relation to foreign financing, which became a law on December 24, 1919, THE EDGE ACT For Foreign Financing Approved December 24, 1919 AN ACT To amend the Act approved December 2^, 1^13, known as the Federal Reserve Act BE it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the Act ap- proved December 23, 1913, known as the Federal Reserve Act, as amended, be further amended by adding a new section as follows : "BANKING CORPORATIONS AUTHORIZED TO DO FOREIGN BANKING BUSINESS Organization of Corporations "Sec. 25 (a). Corporations to be organized for the purpose of en- gaging in international or foreign banking or other international or foreign financial operations, or in banking or other financial operations in a dependency or insular possession of the United States, either directly or through the agency, ownership, or control of local insti- tutions in foreign countries, or in such dependencies or insular pos- sessions as provided by this section, and to act when required by the Secretary of the Treasury as fiscal agents of the United States, may be formed by any number of natural persons, not less in any case than five. Articles of association. — "Such persons shall enter into articles of association which shall specify in general terms the objects for which the association is formed and may contain any other provisions not incon- sistent with law which the association may see fit to adopt for the regulation of its business and the conduct of its affairs. 437 438 Bank and Trade Acceptances Required to be forwarded to Federal Reserve Board. — "Such articles of association shall be signed by all of the persons intending to par- ticipate in the organization of the corporation and, thereafter, shall be forwarded to the Federal Reserve Board and shall be filed and pre- served in its office. The persons signing the said articles of associa- tion shall, under their hands, make an organization certificate which shall specifically state : What is required to be stated. — "First. The name assumed by such corporation, which shall be subject to the approval of the Federal Reserve Board. "Second. The place or places where its operations are to be car- ried on. "Third. The place in the United States where its home office is to be located. "Fourth. The amount of its capital stock and the number of shares into which the same shall be divided. "Fifth. The names and places of business or residence of the persons executing the certificate and the number of shares to which each has subscribed. "Sixth. The fact that the certificate is made to enable the persons subscribing the same, and all other persons, firms, companies, and corporations, who or which may thereafter subscribe to or purchase shares of the capital stock of such corporation, to avail themselves of the advantages of this section. Corporate Functions Organization formalities; directors must be citizens. — "The per- sons signing the organization certificate shall duly acknowledge the execution thereof before a judge of some court of record or notary public, who shall certify thereto under the seal of such court or notary, and thereafter the certificate shall be forwarded to the Federal Re- serve Board to be filed and preserved in. its office. Upon duly making and filing articles of association and an organization certificate, and after the Federal Reserve Board has approved the same and issued a permit to begin business, the association shall become and be a body corporate, and as such and in the name designated therein shall have power to adopt and use a corporate seal, which may be changed at the pleasure of its board of directors ; to have succession for a period Commercial Banking and Cpzdits 439 of twenty years unless sooner dissolved by the act of the shareholders owning two-thirds of the stock or by an Act of Congress or unless its franchises become forfeited by some violation of law; to make con- tracts ; to sue and be sued, complain, and defend in any court of law or equity; to elect or appoint directors, all of whom shall be citizens of the United States ; and, by its board of directors, to appoint such officers and employees as may be deemed proper, de- fine their authority and duties, require bonds of them, and fix the penalty thereof, dismiss such officers or employees, or any thereof, at pleasure and appoint others to fill their places ; to prescribe, by its board of directors, by-laws not inconsistent with law or with the regula- tions of the Federal Reserve Board regulating the manner in which its stock shall be transferred, its directors elected or appointed, its officers and employees appointed, its property transferred, and the privileges granted to it by law exercised and enjoyed. General Powers Foreign exchange operations ; debentures to ten times capital stock and surplus; limitations on deposits; reserve board oversight; re- serve against deposits. — "Each corporation so organized shall have power, under such rules and regulations as the Federal Reserve Board may prescribe : "(a) To purchase, sell, discount, and negotiate, with or without its indorsement or guaranty, notes, drafts, checks, bills of exchange, acceptances, including bankers' acceptances, cable transfers, and other evidences of indebtedness ; to purchase and sell, with or without its indorsement or guaranty, securities, including the obligations of the United States or of any State thereof but not including shares of stock in any corporation except as herein provided ; to accept bills or drafts drawn upon it subject to such limitations and restrictions as the Federal Reserve Board may impose; to issue letters of credit; to purchase and sell coin, bullion, and exchange ; to borrow and to lend money; to issue debentures, bonds, and promissory notes under sucli general conditions as to security and such limitations as the Federal Reserve Board may prescribe, but in no event having liabil- ities outstanding thereon at any one time exceeding ten times its capital stock and surplus; to receive deposits outside of the United States and to receive only such deposits within the United States as may be incidental to or for the purpose of carrying out transactions in 440 Bank and Trade Acceptances foreign countries or dependencies or insular possessions of the United States ; and generally to exercise such powers as are incidental to the powers conferred by this Act or as may be usual, in the determination of the Federal Reserve Board, in connection with the transaction of the business of banking or other financial operations in the countries, colonies, dependencies, or possessions in which it shall transact busi- ness and not inconsistent with the powers specifically granted herein. Nothing contained in this section shall be construed to prohibit the Federal Reserve Board, under its power to prescribe rules and regu- lations, from limiting the aggregate amount of liabilities of any or all classes incurred by the corporation and outstanding at any one time. Whenever a corporation organized under this section receives depos- its in the United States authorized by this section it shall carry re- serves in such amounts as the Federal Reserve Board may prescribe, but in no event less than 10 per centum of its deposits. Establishment of agencies and branches. — "(h) To establish and maintain for the transaction of its business branches or agencies in foreign countries, their dependencies or colonies, and in the dependen- cies or insular possessions of the United States, at such places as may be approved by the Federal Reserve Board and under such rules and regulations as it may prescribe, including countries or dependencies not specified in the original organization certificate. Power to Purchase and Hold Stock Stock of other corporations ; limit to holding. — " (c) With the con- sent of the Federal Reserve Board to purchase and hold stock or other certificates of ownership in any other corporation organized under the provisions of this section, or under the laws of any foreign country or a colony or dependency thereof, or under the laws of any State, depen- dency or insular possession of the United States but not engaged in the general business of buying or selling goods, wares, merchandise or com- modities in the United States and not transacting any business in the United States except such as in the judgment of the Federal Reserve Board may be incidental to its international or foreign business: PROVID- ED, HOWEVER, That, except with the approval of the Federal Re- serve Board, no corporation organized hereunder shall invest in any one corporation an amount in excess of 10 per centum of its own capital and surplus, except in a corporation engaged in the business Commercial Banking and Cpedits 441 of banking, when 15 per centum of its capital and surplus may be so invested: PROVIDED FURTHER, That no corporation organ- ized hereunder shall purchase, own, or hold stock or certificates of ownership in any other corporation organized hereunder or under the laws of any State which is in substantial competition therewith, or which holds stock or certificates or ownership in corporations which are in substantial competition with the purchasing corporation. Purchase to prevent loss. — "Nothing contained herein shall prevent corporations organized hereunder from purchasing and holding stock in any corporation where such purchase shall be necessary to prevent a loss upon a debt previously contracted in good faith ; and stock so purchased or acquired in corporations organized under this section shall within six months from such purchase be sold or disposed of at public or private sale unless the time to so dispose of same is extended by the Federal Reserve Board. Limitations on Scope of Activities Business in United States. — "No corporation organized under this section shall carry on any part of its business in the United States except such as, in the judgment of the Federal Reserve Board, shall be incidental to its international or foreign business : AND PRO- VIDED FURTHER, That except such as is incidental and prelim- inary to its organization no such corporation shall exercise any of the powers conferred by this section until it has been duly authorized by the Federal Reserve Board to commence business as a corporation organized under the provisions of this section. Price Fixing "No corporation organized under this section shall engage in com- merce or trade in commodities except as specifically provided in this section, nor shall it either directly or indirectly control or fix or at- tempt to control or fix the price of any such commodities. The char- ter of any corporation violating this provision shall be subject to forfeiture in the manner hereinafter provided in this section. It shall be unlawful for any director, officer, agent, or employee of any such corporation to use or to conspire to use the credit, the funds, or the power of the corporation to fix or control the price of any such com- 442 Bank and Trade Acceptances modities, and any such person violating this provision shall be liable to a fine of not less than $1,000 and not exceeding $5,000 or imprison- ment for not less than one year and not exceeding five years, or both, in the discretion of the court. Capital Stock and Dividends $2,000,000 minimum; investments by banks. — "No corporation shall be organized under the provisions of this section with a capital stock of less than $2,000,000, one-quarter of which must be paid in before the corporation may be authorized to begin business, and the remain- der of the capital stock of such corporation shall be paid in install- ments of at least 10 per centum on the whole amount to which the corporation shall be limited as frequently as one installment at the end of each succeeding two months from the time of the commence- ment of its business operations, until the whole of the capital stock shall be paid in. The capital stock of any such corporation may be increased at any time, with the approval of the Federal Reserve Board, by a vote of two-thirds of its shareholders or by unanimous consent in writing of the shareholders without a meeting and without a formal vote, but any such increase of capital shall be fully paid in within ninety days after such approval ; and may be reduced in like manner, provided that in no event shall it be less than $2,000,000. No corporation, except as herein provided, shall during the time it shall continue its operations, withdraw or permit to be withdrawn, either in the form of dividends or otherwise, any portion of its capital. Purchase of stock. — "Any national banking association may invest in the stock of any corporation organized under the provisions of this section, but the aggregate amount of stock held in all corporations en- gaged in business of the kind described in this section and in section 25 of the Federal Reserv^ Act as amended shall not exceed 10 per centum of the subscribing bank's capital and surplus. American Ownership Directors, officers, etc. — "A majority of the shares of the capital stock of any such corporation shall at all times be held and owned by citizens of the United States, by corporations the controlling interest in which is owned by citizens of the United States, chartered under Commercial Banking and Cp£dits 443 the laws of the United States or of a State of the United States, or by firms or companies, the controlling interest in which is owned by citizens of the United States. The provisions of section 8 of the Act approved October 15, 1914, entitled 'An Act to supplement existing laws against unlawful restraints and monopolies, and for other pur- poses,' as amended by the Acts of May 15, 1916, and September 7, 1916, shall be construed to apply to the directors, other officers, agents, or employees of corportaions organized under the provisions of this section: PROVIDED, HOWEVER, That nothing herein contained shall (1) prohibit any director or other officer, agent or employee of any member bank, who has procured the approval of the Federal Re- serve Board from serving at the same time as a director or other officer, agent or employee of any corporation organized under the pro- visions of this section in whose capital stock such member bank shall have invested; or (2) prohibit any director or other officer, agent, or employee of any corporation organized under the provisions of this section, who has procured the approval of the Federal Reserve Board, from serving at the same time as a director or other officer, agent or employee of any other corporation in whose capital stock such first mentioned corporation shall have invested under the provisions of this section. Directors Reserve Board members. — "No member of the Federal Reserve Board shall be an officer or director of any corporation organized un- der the provisions of this section, or of any corporation engaged in a similar business organized under the laws of any State, nor hold stock in any such corporation, and before entering upon his duties as a mem- ber of the Federal Reserve Board he shall certify under oath to the Secretary of the Treasury that he has complied with this requirement. DISSOLUTION Liability of Stockholders, Officers and Directors "Shareholders in any corporation organized under the provisions of this section shall be liable for the amount of their unpaid stock sub- scriptions. No such corporation shall become a member of any Fed- eral Reserve bank. 444 Bank and Trade Acceptances Forfeiture of Franchise Violation of law. — "Should any corporation organized hereunder violate or fail to comply with any of the provisions of this section, all of its rights, privileges, and franchises derived herefrom may thereby be forfeited. Before any such corporation shall be declared dis- solved, or its rights, privileges, and franchises forfeited, any noncom- pliance with, or violation of such laws shall, however, be determined and adjudged by a court of the United States of competent jurisdic- tion, in a suit brought for that purpose in the district or territory in which the home office of such corporation is located, which suit shall be brought by the United States at the instance of the Federal Reserve Board or the Attorney General. Upon adjudication of such noncom- pliance or violation, each director and officer who participated in, or assented to, the illegal act or acts, shall be liable in his personal or individual capacity for all damages which the said corporation shall have sustained in consequence thereof. No dissolution shall take away or impair any remedy against the corporation, its stockholders, or officers for any liability or penalty previously incurred. Voluntary liquidation. — "Any such corporation may go into volun- tary liquidation and be closed by a vote of its shareholders owning two-thirds of its stock. Insolvency and Receivership "Whenever the Federal Reserve Board shall become satisfied of the insolvency of any such corporation, it may appoint a receiver who shall take possession of all of the property and assets of the corporation and exercise the same rights, privileges, powers, and authority with respect thereto as are now exercised by receivers of national banks appointed by the Comptroller of the Currency of the United States : PROVID- ED, HOWEVER, That the assets of the corporation subject to the laws of other countries or jurisdictions shall be dealt with in accord- ance with the terms of such laws. Finances Annual meetings; reports and examinations. — "Every corporation organized under the provisions of this section shall hold a meeting of Commercial Banking and Cpedits 445 its stockholders annually upon a date fixed in its by-laws, such meet- ing to be held at its home office in the United States. Every such corporation shall keep at its home office books containing the names of all stockholders thereof, and the names and addresses of the mem- bers of its board of directors, together with copies of all reports made by it to the Federal Reserve Board. Every such corporation shall make reports to the Federal Reserve Board at such times and in such forms as it may require ; and shall be subject to examination once a year and at such other times as may be deemed necessary by the Federal Reserve Board by examiners appointed by the Federal Reserve Board, the cost of such examinations, including the compensation of the ex- aminers, to be fixed by the Federal Reserve Board and to be paid by the corporation examined. Dividends. — "The directors of any corporation organized under the provisions of this section may, semiannually, declare a dividend of so much of the net profits of the corporation as they shall judge expedi- ent; but each corporation shall, before the declaration of a dividend, carry one-tenth of its net profits of the preceding half year to its sur- plus fund until the same shall amount to 20 per centum of its capital stock. Taxation State Taxation. — "Any corporation organized under the provisions of this section shall be subject to tax by the State within which its home office is located in the same manner and to the same extent as other corporations organized under the laws of that State which are transacting a similar character of business. The shares of stock in such corporation shall also be subject to tax as the personal prop- erty of the owners or holders thereof in the same manner and to the same extent as the shares of stock in similar State corporations. Renewal Twenty-year period. — "Any corporation organized under the pro- visions of this section may at any time within the two years next previous to the date of the expiration of its corporate existence, by a vote of the shareholders owning two-thirds of its stock, apply to the Federal Reserve Board for its approval to extend the period of its 446 Bank and Trade Acceptances corporate existence for a term of not more than twenty years, and upon certified approval of the Federal Reserve Board such corpora- tion shall have its corporate existence for such extended period unless sooner dissolved by the act of the shareholders owning two-thirds of its stock, or by an act of Congress or unless its franchise becomes for- feited by some violation of law. Conversion Conversion of State institutions; State law. — "Any bank or bank- ing institution principally engaged in foreign business incorporated by special law of any State or of the United States or organized under the general laws of any State or of the United States and having an unimpaired capital sufficient to entitle it to become a corporation un- der the provisions of this section may, by the vote of the shareholders owning not less than two-thirds of the capital stock of such bank or banking association, with the approval of the Federal Reserve Board, be converted into a Federal corporation of the kind authorized by this section with any name approved by the Federal Reserve Board : PROVIDED, HOWEVER, That said conversion shall not be in con- travention of the State law. In such case the articles of association and organization certificate may be executed by a majority of the di- rectors of the bank or banking institution, and the certificate shall de- clare that the owners of at least two-thirds of the capital stock have authorized the directors to make such certificate and to change or convert the bank or banking institution into a Federal Corporation. A majority of the directors, after executing the articles of associa- tion and the organization certificate, shall have power to execute all other papers and to do whatever may be required to make its organi- zation perfect and complete as a Federal corporation. The shares of any such corporation may continue to be for the same amount each as they were before the conversion, and the directors may continue to be directors of the corporation until others are elected or appointed in ac- cordance with the provisions of this section. When the Federal Re- serve Board has given to such corporation a certificate that the pro- visions of this section have been compiled with, such corporation and all its stockholders, officers, and employees, shall have the same pow- ers and privileges, and shall be subject to the same duties, liabilities, and regulations, in all respects, as shall have been prescribed by this section for corporations originally organized hereunder. Commercial Banking and Cp£dits 447 Embezzlement — Penalties False entries; penalties for abuses. — "Every officer, director, clerk, employee, or agent of any corporation organized under this section who embezzles, abstracts, or wilfully misapplies any of the moneys, funds, credits, securities, evidences of indebtedness or assets of any character of such corporation; or who, without authority from the directors, issues or puts forth any certificate of deposit, draws any or- der or bill of exchange, makes any acceptance, assigns any note, bond, debenture, draft, bill of exchange, mortgage, judgment, or decree ; or who makes any false entry in any book, report, or statement of such corporation with intent, in either case, to injure or defraud such cor- poration or any other company, body politic or corporate, or any indi- vidual person, or to deceive any officer of such corporation, the Federal Reserve Board, or any agent or examiner appointed to examine the affairs of any such corporation ; and every receiver of any such cor- poration, and every clerk or employee of such receiver who shall embezzle, abstract, or willfully misapply or wrongfully con- vert to his own use any moneys, funds, credits, or asests of any character which may come into his possession or under his con- trol in the execution of his trust on the performance of the duties of his employment; and every such receiver or clerk or employee of such receiver who shall, with intent to injure or defraud any person, body politic or corporate, or to deceive or mislead the Federal Re- serve Board, or any agent or examiner appointed to examine the af- fairs of such receiver, shall make any false entry in any book, report, or record of any matter connected with the duties of such receiver; and every person who with like intent aids or abets any officer, direc- tor, clerk, employee, or agent of any corporation organized under tliis section, or receiver or clerk or employee of such receiver as aforesaid in any violation of this section, shall upon conviction thereof be im- prisoned for not less than two years nor more than ten years, and may also be fined not more than $5,000, in the discretion of the court. False Representation "Whoever being connected in any capacity with any corporation organized under this section represents in any way that the United States is liable for the payment of any bond or other obligation, or the 448 Bank and Trade Acceptances interest thereon, issued or incurred by any corporation organized here- under, or that the United States incurs any liability in respect of any act or omission of the corporation, shall be punished by a fine of not more than $10,000 and by imprisonment for not more than five years." \^^ UNIVERSITY OF CALIFORNIA AT LOS ANGELES THE UNIVERSITY LIBRARY This book is DUE on the last date stamped below .JAN 2 7 1954 dUL30ig76 Form L-0 UKiVEU^.ii uF CALIFORNIA AT LOS ANGELES LIBRARY UC SOUTHERN REGIONAL LIBRARY FACIl ITY -- Jilll III till lllli AA 000 559 601