r HG yc ;f*«*.F $8 ?a4 ■^ao GIFT OF ill i! Bank Acceptances Guaranty Trust Company of New York 140 Broadway Fifth Avenue Branch London Office 5th Ave. and 43d St. 33 Lombard St., E. C. Copyright, 1915 by Guaranty Trust Company of Npw York ACCEPTANCES Definition In order to thoroughly understand the meaning of an acceptance it is first necessary to consider the definition of a hill of ex- cliange, because an acceptance is first a bill of exchange before it becomes an acceptance. A bill of exchange, therefore, is an un- conditional order, in writing, addressed by one person to another, signed by the per- son giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed future time, to order or to bearer, a sum certain in money. A bill of exchange becomes an acceptance when the drawee writes across the face of it for example: Accepted, February 15, 1915, payable May 15, 1915, John Doe." 332196 Two Kinds of Acceptances There are two kinds of acceptances : (1) Those made by private parties, such as individuals, firms or corporations; (See page 2.) (2) Those made by banks for their cus- tomers by means of which the credit of the bank is extended to the customer. (See page 4.) Acceptances made by private parties are usually in connection with transactions for the purchase of merchandise or for the financing thereof. Bank Acceptances A bank acceptance consists of the extensionof the bank's credit to a customer by which the bank permits the use of its own credit by its client for a consideration, such credit being either secured or un- secured, depending entirely upon the busi- ness character and financial responsibility of the applicant. A hank aceeptaiicemaiy be created as follows : A B & Co. in New York buy of C D & Co. in Galveston a quantity of merchandise. In order to reimburse C D & Co. in a convenient manner, A B & Co. arrange with their bank to accept on presentation the drafts of C D & Co., with documents for the mer- chandise attached. C D & Co. there- upon, under the terms of the sale, draw on the bank, which accepts the drafts, taking the documents. The draft thus becomes a bank acceptance. Then en- sues a credit operation between the bank and A B & Co. as to what disposition is to be made of the documents and under what terms A B & Co. shall receive the documents from the bank, (it must be borne in mind that the bank is primarily liable upon its acceptance and the security for its acceptance is the mer- chandise for which it so acted.) This is usually easily adjusted. A B & Co. undertake by some means or other, to provide the bank with funds prior to maturity of the draft in order that the acceptance for which the bank stands responsible, at the request of A B & Co., may be met. New York State Banking Law Under the new Banking Law of the State of New York, passed in 1914, banks and trust companies that are under the supervision of the State Banking Depart- ment are permitted to accept for payment at a future date drafts drawn upon (them) by (their) customers and issue letters of credit authorizing the holders thereof to draw drafts upon (them) or (their) corre- spondents at sight or on time, not exceeding one year.'* By this provision all state banks and trust companies in New York State are given the power to make both foreign and domestic acceptances. Federal Reserve Act The Federal Reserve Act permits mem- ber banks to accept bills involving the ex- portation or importation of goods, but does not permit the acceptance of bills covering domestic transactions 6 Market for Acceptances It is obvious that prime bank acceptances, backed as they are by well-known banks or trust companies, and readily rediscountable, can find eager purchasers by virtue of their high intrinsic security as the most liquid form of investment for banking institutions. Aside from cash in the vault nothing is so rapidly liquidated, especially in view of the existing Federal Reserve system. Acceptances are an important factor in Europe in the open discount market, and as soon as a market is provided in this country they no doubt will become a most popular form of investment. With the object of assisting in the estab- lishment of such a market, which as yet is only slightly developed, the Guaranty Tiiist Company of New York has been deal- ing in first-class paper of this character since the present New York State Banking Law was passed. 7 Advantages There are certain distinct advantages both to banks and their customers to be derived from the creation of acceptances. These may be summarized as follows : (1) Bank customers can ordinarily borrow by this means more cheaply than by their straight note. (2) The use of acceptances makes it pos- sible for bank^ and trust companies to properly and conveniently finance legitimate business transactions of their customers without using any of the bank's funds or the use of any additional funds. (3) Banks having surplus money which cannot be readily employed at the time can invest it in prime acceptances, which can either be held until matu- rity or sold in the open market, should such action be found necessary. (4) Acceptances of well-known institutions will more and more be sought as short-term investments and will be especially valuable for such a purpose, principally on account of their ready marketability. (5) Banks and trust companies can accept for a commission the paper issued by their best customers and sell it in the open market, thus adding to their business another feature which can be a source of definite profit. (d) The presence of the name of the accepting bank makes prime to the extent of the credit of the accepting bank the paper on which it appears. This at once eliminates the necessity and bother of checking the drawer or several endorsers upon paper, as the primary responsibility rests with the accepting bank. If this is in good credit all other names on the paper be- come proportionately of less interest. (7) With the development of the use of bank acceptances, the knowledge of the relations that the borrower has with other institutions, which the credit-extending banks will thus have, will create a condition of almost automatic registration of paper ; thus more than ever protecting the banks as well as the borrowers from the evil results of the over-extension of credit. 9 Table showing Attitude of the Banking Laws of the Various States in Relation to Acceptances No Partial Specific Power Power Power State to Accept to Accept to Accept Alabama * Arizona! Arkansas. ...... * California '^ Colorado "^ Connecticut . . . . '^ Delaware ...... ^ Florida '^ Georgia * Idaho ^^ Illinois, t Indiana '^ Iowa. * Kansas * Kentucky '"^ Louisianaf ..... T^ Maine "^ , ^^ , State Maryland | On?^^ Massachusetts . • ^ Michigan '"^ Minnesota.. - • • ^ Mississippi! . ... Missouri * Montana ^^ Nebraska ''^ tNo information received. tNo provision to accept mentioned In the law; considered to have this power under broad provision to do general banking business. 10 Table showing Attitude of the Banking Laws of the Various States in Relation to Acceptances No Partial Specific Power Power Power State to Accept to Accept to Accept Nevadaf New Hampshire New Jersey. . • . New Mexico. . • . New York North Carolina.. North Dakota. . Ohio e Oklahoma Oregon * 5{c Pennsylvania . . - Rhode Island. . . South Carolina. South Dakota. • . Tennessee Texas Utah Vermont Virginia ^ Washington .... West Virginia. . * Wisconsin * Wyoming * tNo information received. 11 Forelg-n ■< . Accept- ( ances Only f Common I Law 1 UNIVERSITY OF CALIFORNIA LIBRARY THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW m-- - -•■' t Q.I916 ty Lz APR 8 1921 m^i ^ m\ » 1 1 nn OCT 14 ,930 / / / / Gaylord Bros. Makers Syracuse, N. Y. PAT. JAN. 21, 1908 UNIVERSITY OF CALIFORNIA LIBRARY