This by quoting higher prices, which are passed on to other buyers at still higher levels. The open account is a prolific source of slow collections, bad debts and losses. Though payable, theoretically, within a given time, it is too generally regarded as payable when convenient. makes for lax business, over-buying, and unfriendly disputes. Generally the buyer who allows his account to run for months beyond the time agreed upon for payment has no thought of paying interest for the time his payment is overdue. And, when finally the exasperated seller decides to sue in order to collect the account, he may have to prove the correctness of his book entries, and meet objections, set offs and counter claims interposed by the debtor, all involving further delay and expense. Abuses of Cash Discounts Closely associated with the open book account is the cash discount, the frequent abuses of which have brought it into disrepute. How commonly buyers fall into the habit of withholding remittances for days or weeks beyond the discount date agreed upon, thus borrowing money without interest from the seller for the overdue time. Moreover, the cash discount is generally speaking unscientific in its practical operations. The concern quoting invoice terms, say 2 per cent. 10 days, or 60 days net, will certainly figure prices to cover this discount. The cash discount is essentially a bait to encourage prompt remittances, and in so far as it actually accomplishes this purpose, it is a high premium to pay for it. It might seem that the advantages of the trade acceptance as contrasted with the open book account are now so well and so universally understood as to make further comment or analysis unnecessary. The fact is, however, that while considerable progress has been made in the adoption of the trade acceptance, thousands of business firms have as yet made no attempt to introduce it, and hundreds have no real conception of its advantages or even of its modus operandi. For these some pertinent considerations may be restated. Advantages of Trade Acceptances The advantages of the trade acceptance to the seller of merchandise and to the banker whose function it is to make short term advances upon approved assets to the business community, are obvious. The advantages to the ing and uncertain inconvertible book account of a readily and economically negotiable instrument of credit; (3) the automatic provision of funds necessary to finance each account thus releasing the seller's own capital for use in the upbuilding of his business in other ways; or the reduction of the amount of working capital needed with a corresponding increase in the ratio of earnings to capital actually employed. Wider Preferential Rates on Acceptances It is not enough to argue that the trade acceptance will stabilize and liquify the entire credit structure, that it will release working capital, make for bigger and sounder business, and strengthen the credit situation against the day of business depression or distress. The retailer must be shown how the trade acceptance will bring him profit, in his own everyday business. The advantages growing out of the use of trade acceptances must be distributed or shared all the way down the line from the bank to the retail business. The low rediscount_rate on this form of paper should be passed along. from the banker to the manufacturer, from him to the jobber or wholesaler, and finally the retailer should be reached. Banks should be as willing to discount small acceptances as large ones and at as favorable rates. Preferential rates on acceptances might be made even wider than they have been thus far to provide the necessary incentive to borrowers. Bankers should steadily seek to influence single-name borrowers to make an effort to get their open accounts converted into acceptances. Sellers should allow acceptors to anticipate payment on their acceptances at the prevailing discount rate, and reasonable leniency must be shown acceptors who find it inconvenient to pay their acceptances at maturity—but an acceptance should never be taken as a renewal of an existing acceptance. Wholesalers should firmly refuse to carry buyers unwilling to give acceptances, explaining how the new Reserve system makes possible a sounder banking and credit system through the use of acceptances-and clinching the argument by the further explanation that because he will reap an advantage by closing the transaction with a negotiable instrument of the highest bank credit standing, he is willing to share this advantage with his customer in the form of a special "acceptance discount," longer terms, or other trade concession. Slowly, stead seller may be summarized under a few general ily, the trade acceptance should be made the headings: (1) The completion of the transaction upon receipt of goods or invoice and acceptance of draft by the purchaser, and the implied acknowledgment of the correctness of the account, thus avoiding or reducing the evils of extensions, counter claims, unearned discounts, unwarranted return of merchandise, etc.; (2) the substitution for the costly, annoy only alternative to actual cash sales. Banker's Relation to Acceptance System Returning once more to the banker's relation to the acceptance system, we must remind ourselves that as a "manufactory of credit" and as the custodian of the final cash reserves of the country upon which basically all credit rests, the bank's responsibility in this issue is primary. The Federal Reserve system and the recently enacted legislation of several of the States, by providing for bank acceptances and for the rediscount of trade acceptances furnish the bankers of this country with machinery for keeping banking credit flexible and fluid. The banker is primarily a dealer in credit and the acceptance system is an invaluable aid to him in the task of keeping the entire credit system sound and healthy. Double name paper of this character representing a current business transaction and not past due accounts, or speculative dealings, or fixed capital investments, is the most liquid and desirable asset a bank can hold. Under intelligent and unselfish encouragement banks will get an increasing volume of such paper in the place of single-name paper, which frequently does not represent a commercial transaction at all, which for the most part is unstandardized, and which gives the bank little opportunity to check the credit operations of the borrower. Acceptances provide additional reserve since they are readily discountable at the Federal Reserve bank at preferential rates. False Prejudice Against Rediscounting In passing may it be urged that if there remains anywhere in this country a banker upon whom there still rests the benighted prejudice against taking his prime commercial paper to the Federal Reserve banks for rediscount on the ground that it may suggest weakness, he will cast it into everlasting limbo. Rediscounting is no longer an evidence of weakness, but of strength showing that the bank handles paper which measures up to the supremest test. Rediscounting is not a favor, it is a right! National banks are not compelled to include trade acceptances in the limitation of 10 per cent. of capital and surplus loanable to any one borrower; this restriction applying only to the aggregate of such bills bearing the signature or endorsement of any one acceptor. These banks, therefore, will be better able to extend to borrowers using acceptances full accommodations for their legitimate needs, freed from the former haunting fear of dead, illiquid paper in their portfolios. Though lower rates may prevail on acceptances than on single name paper, the net earnings of the bank may eventually be larger, certainly they will be more reliable. The enhanced soundness and liquidity of the whole underlying credit strucure will in any event be ample compensation. The fundamental consideration to the banker, overshadowing all other considerations, whether of profit or policy, is that this nation is at war, that the war is likely to be prolonged, and that our banking resources in common with all other resources, material and spiritual, must be mo bilized in the most effective way for complete and early victory. It is through the banks mainly that the credit and financial resources of the nation must be mobilized and kept in fighting form. Substantially every bank in the country was a station for the recruiting of dollars in the recent highly successful Liberty Loan campaign-a splendid exhibition of the ready willingness to serve and to co-operate with the Government and the public in a great cause. The banks themselves have participated generously in the loans, and undoubtedly will respond as freely to the demands which subsequent Government loans will require of them. In order that they may fully measure up to these demands, it is imperative that they shall keep their resources as liquid as possible. In no other way can this be accomplished as largely, as surely, as by promoting everywhere the use of the acceptance. The Foundation of Bankers Acceptances What has been said of the trade acceptance as a desirable credit device in times of peace or of war applies with added force to the bankers acceptance, an instrument practically unknown among us prior to the establishment of the Federal Reserve system, but now coming into steadily expanding use. This form of banking accommodation has been growing in favor despite the fact that accommodations have been available through commercial paper at low rates. It has enabled exporters and importers to finance their requirements by opening credits with their bankers on transactions involving both present needs and future arrangements. Many banks have been making acceptances and other banks have been discounting or buying them as a field for the employment of surplus funds. This form of credit instrument is the most highly liquid of all bank investments. How war finance will affect bank acceptances is problematical. It seems likely, however, that with the reduction in the amount of capital available for ordinary industrial and commercial use, because of the substitution of Government financing for private financing, the spread of the banker's acceptance may be temporarily curtailed in common with other forms of commercial securities. While the necessities of war finance must have the right of way, and while bank investments will inevitably be influenced for some time by Government issues, the great advantage of the bank acceptance as a liquid asset must be recognized. Every effort should be made to hold and strengthen the advances already made through the use of the bank acceptance. Financing Foreign Bills The acceptance provisions of the Federal Reserve Act and enacted by State legislatures liberates the American importer from dependence upon London for the financing of his foreign bills and lays the foundation for conducting our foreign business in terms of "dollar credits" instead of sterling. Heretofore, because our banks were not permitted to accept time drafts, American importers have had to pay cash for their goods or to arrange with London banks to accept for them. As this arrangement was usually made through a New York bank it necessitated a second commission and involved loss of time and uncertainty in rates of exchange by reason of having to remit to London to meet the acceptance at maturity. So, too, the handicap has been taken off the American exporter by the establishment of branch banks in foreign countries. Instead of settling accounts with foreign customers through London as heretofore, direct financial connection is established through branch banks with New York, again saving the London banker's commission, the time lost in remitting, and possible loss through changing rates for sterling. With the United States a creditor nation, temporarily at least, and with adequate credit machinery for handling the export and import trade, dollar exchange bids fair to become in time as well known in the marts of the world as pounds sterling. Advantage of Bank Acceptances Summarized The advantages of the bank acceptances may be summarized as follows: 1. Bank customers can ordinarily borrow more cheaply by this means than by their promissory notes. 2. Banks and trust companies can finance legitimate business transactions without actually using any of their funds. 3. At periods when banks have surplus money they can invest it in prime acceptances which if it becomes necessary may readily be sold in the open market. Heretofore surplus reserves have been loaned largely on the stock exchange, since that was the chief liquid market available, thus fostering speculation at the expense of commercial business. Now that condition will be reversed. 4. Acceptances of well-known banks will be in demand as short-term investments because of their ready marketability. 5. Banks can accept for a commission and sell the paper in the open market, thus adding a new source of profit. 6. The presence of the name of the accepting bank on an acceptance makes it unnecessary to check the drawer or indorsers, as the primary responsibility rests with the accepting bank. 7. The information that accepting banks will have through the wide use of bank acceptances as to the relations of the borrower with other institutions will act as an almost automatic registration of paper, thus protecting both banks and borrowers from the evils of the overextension of credit. LIBERTY LOAN PAYMENTS OCCASION NO SERIOUS DISTURBANCE Mr. Gates W. McGarrah, president of the Mechanics and Metals National Bank of New York, in a recent letter to its correspondents, calls attention to the task which confronts the bankers of the country in connection with Liberty Loan payments to be completed by August 30th, of which 20 per cent., amounting to $400,000,000 has already been turned over to the Government; another 20 per cent. payment will have to be consummated by the end of July and the remaining 60 per cent., amounting to $1,200,000,000 will have to be made in August. Commenting upon the effect of such huge payments upon the financial markets and the banking position in particular Mr. McGarrah says: "It is a matter of vast importance to the entire country that payments thus far have been negotiated without financial disturbance and without stringency in the money markets. Notwithstanding the many financial developments since our entrance into the war, commercial borrowers throughout the country have not been in any way inconvenienced through a lack of ample funds for their needs at moderate rates. That intricate apparatus known as our banking and credit system has been supplemented by the Federal Reserve system; it will be observed from the statements made to the Comptroller of the Currency, particularly by the large financial institutions, that many of them have made full and free use of the rediscount facilities in order that they might in turn render every possible assistance to the Government in its financing, and at the same time continue as helpful as possible to the commercial interests of the country. "By reason of the reduction in legal reserves as provided by the recently enacted amendments, banks throughout the country, we are pleased to learn, will be enabled to continue relations with their correspondents in the reserve centers as heretofore, carrying with them, at interest, all of that part of their surplus which need not be held for vault cash, and continue to receive the services and assistance which such correspondents will continue to be in a position to extend to them. FAR-FLUNG RELIEF WORK OF AMERICAN RED CROSS It Corn Exchange Bank, $30,000; Metropolitan Trust Company, $20,000, and Liberty National Bank, $20,000. The list of large contributors includes many more banks and trust companies of this and other cities. Stupendous Safe Deposit Vault Transactions Few people not connected intimately with the work have any idea of the volume of securities handled in the daily routine in a financial institution. The Bankers Trust Company of Ne York announces that during the six months ending June 30th, there were deposited in and withdrawn from its vault securities and cash of the par value of $49,635,376,000. As safe deposit vaults are not rented to the public, this stupendous total represents only transactions connected with the company's business. Never before in the history of the world has such a great fund been raised for the alleviation of human suffering in time of war as the sum realized from the recent American Red Cross campaign aggregating nearly $120,000,000. must be a matter of special interest to readers of TRUST COMPANIES Magazine that not only did banks and trust companies, by means of special contributions and Red Cross dividends, make up a large part of this total but that the man selected to administer American Red Cross work in France was selected from the ranks of trust company officials. Major Grayson M. P. Murphy, who is now in France and in charge of Red Cross relief work there, and who has also been appointed a member of General Pershing's staff, relinquished his duties as a vice-president of the Guaranty Trust Company of this city, to engage in this great humanitarian task in France where the American advance army is already assembled within sound, if not range of the guns. The same patriotic resolve which characterized the American bankers and trust company interests in putting over the Liberty Loan was again manifested in connection with the recent Red Cross Campaign. To conduct this campaign the President called upon another banker-Henry P. Davison, of the house of J. P. Morgan & Company, and in New York the work of raising the quota from this district was entrusted to Mr. Seward Prosser, president of the Bankers Trust Company who labored day and night. Harvey H. Gibson, president of the Liberty National Bank, has been designated general manager of the Red Cross organization. The general contributions forthcoming from New York banks and trust companies but reflected the big part played in this campaign by banks and trust companies throughout the country. Lack of space forbids due mention of all the important bank and trust company contributions of this and other cities in the form of special dividends or direct contributions. Among the larger New York gifts from these sources were Bankers Trust Company, $225,000; Guaranty Trust Company, $200,000; Equitable Trust Company, $60,000; Columbia Trust Company, $50,000; Irving National Bank, $40,000; New York Trust Company, $30,000; STRATEGIC CENTER IN THE RECENT RED CROSS CAMPAIGN IN NEW YORK In connection with the campaign to raise New York's quota of the American Red Cross fund, a huge thermometer was displayed on the corner of the Bankers Trust Company Building, overlooking the heart of the Wall Street district. Each afternoon the stirring tones of a bugle call drew attention to the upward course of the arrow as the returns for the day were chronicled. FEDERAL RESERVE BANKS SHOULD NOT BE OPERATED FOR PROFIT EARNINGS INCREASED BY WAR FINANCE OPERATIONS EX-GOVERNOR EDWARD C. STOKES President The Mechanics National Bank of Trenton, New Jersey (EDITOR'S NOTE: Even the most zealous supporters of the Federal Reserve system are ready to admit that it is not a perfect machine. Among many bankers of broad experience and practical insight there is serious doubt as to the wisdom of those features of the system which render it necessary for the funds of member banks, upon which no interest is paid, to be used in "open market" competition, especially in investments in municipal warrants and loans. Governor Stokes, in the following article, puts forth the suggestion that the capitalization of Federal Reserve banks is not only unnecessary but that the repeal of this provision would make for greater harmony and efficiency.) In this period of trouble and danger, when the hearts and minds of men are swayed by the impulse of patriotism we are apt to accept the conclusions of those in authority without question. Patriotic though this trait may be it is fraught with danger, particularly in its bearing upon future relations between Government and business as well as the individual. The most erlightened patriotism is not blind acquiescence in whatever is laid down by those in authority but an intelligent, discriminating judgment on problems at issue, for the purpose of securing the best possible ways and means. At the present time the bankers of this country, as they always have done in America's history, are rallying to the Government's support. In their patriotic ardor they are inclined to accept any conditions which may be imposed upon them without question. Their loyalty, however, should not preclude but rather give them the right to suggest changes that will make the work they are doing for the country less burdensome and more efficient: Indeed they will be in a better position to render service and more effective service if some manifest burdens of the present banking system are remedied or removed. Federal Reserve Bank Competition The Federal Reserve system was devised as a means to mobilize the banking reserves of the country and keep them at all times ready for need or emergency. A reserve system and a money making system represent two entirely distinct functions. A reserve system, it seems to me, should be confined to the function its name indicates and it should not be diverted from that function for the purpose of profit. If the Federal Reserve banks are to engage in the business of making money it is manifestly unfair that they should use for this purpose the funds of the institutions with which they are competing and use them without interest. Sometime ago in an article I said: "The Regional Reserve bank, under the law, can come into a municipality, loan the municipality money, or buy municipal warrants. This bank thus takes the money of its member banks, without interest, and can then use that money to bid against the member banks for municipal warrants or municipal loans, in the member banks' own city. Of course, it can give better terms than the member bank, because the Regional Reserve bank is getting its funds for nothing, while the member banks are compelled to pay their depositors from two to three per cent. interest." An act that permits one institution to take the funds of a dependent institution, without interest, and then uses those funds to compete against the dependent institution, which furnishes them, is unethical and violates the principle of fair competition on which business must be conducted if it is to survive. Indeed, it is this principle of fair competition, thus violated, which our Government has sought to promote with the anti-trust laws, the prohibition of railroad rebates, and in the creation of the Interstate Commerce Commission and the Industrial Trade Commission. To plead that the Regional Reserve bank will not bid against member banks for municipal loans or municipal warrants in the member bank's own city, is not a sufficient answer. The principle is still in force, the power to do so is still the law of the land and the menace still |