CHAPTER III

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ACCEPTANCES.

E have seen that commercial paper is that medium of finance used to carry salable merchandise, or its equivalent, such as the labor used to market the merchandise, and nothing else. Acceptances are one kind of commercial paper; but they are by present day banking custom used only as a medium of finance in short time, sixty to ninety day, transactions in actual goods which are sold or which are readily salable. Again, according to present custom, they arise only between the original buyer and seller, or between the holder of the goods and some financial institution, in which case the holder of the goods represents the seller and the financial institution a pro tempore buyer. Commercial paper is a comparatively broad term covering a wide field of merchandise financing. Acceptances are a much narrower term, limited in its application to cases where two interested parties say through their signatures on a note that certain definite merchandise, which the note obviously represents, has in their opinion a certain value, and that it is sold, or for the time being is as good as sold. The object is, of course, to give the public the strongest possible assurance that the necessary money to take care of the note at maturity will be available for this purpose.

An Example of An Acceptance.

An individual or firm wishes to buy some merchandise. Instead of paying cash the individual or firm in question instructs the individual or firm doing the selling to draw a draft, that is, an order to pay, on them, to be due at a certain definite time from date. The firm making the purchase of the merchandise then does what is called "accepting" the draft in question. It does this by having the word "accepted" written across the face of the note and putting its signature below this word. Such a draft is usually drawn payable to the order of the maker and endorsed by the maker. The same result is obtained, and what may be regarded as an acceptance results, if instead of having the word "accepted" written across the face of the note the buyer of the goods simply endorses the note on the back, or even writes a letter stating that he accepts the draft referred to. But the first form is the customary one for such transactions. This is the simplest form of acceptance. What may be regarded as an equivalent of such an acceptance is the ordinary trade note where the buyer of goods gives his note to the seller, who endorses. This form of note is the receivable already referred to in this book, but it is not properly an acceptance. An acceptance is fundamentally an order to pay drawn by one person, firm or corporation on some other and accepted by the other in such a way that the acceptance clearly identifies the original document.

A pamphlet entitled "Acceptances" published by the Mechanics and Metals National Bank of the City of New York says: "The acceptance is the simple and logical product of generations of trade and banking experience." The reason is easily deducible, for, especially in the early days of trade, money was hard to secure, there was no definite monetary system, and credit was not easily estimated. A promissory note with two good names on it was an earnest of payment at maturity that the single name paper could never be, and of such notes the draft which was accepted was the form of document which most easily came into being. Its use allowed greater latitude for trade based on well estimated future trade conditions than did the single name paper, which if it had been used in early days. would have necessitated more nearly immediate cash settlement. The history of acceptances dates back several hundred years.

Growth of Acceptances.

The first real market for acceptances occurred in England. The reason for this was that trade developed more rapidly there than in other countries. England was a great importing country and her merchants developed a more accurate and wider knowledge of trade conditions than did the merchants of other countries. Notes based on their experience consequently were likely to be regarded as safer notes than the paper of others. Also, there was need of the appearance of cash somewhere in the trade, and it was England that afforded the only free

gold market in the world. A bill drawn on London provided gold if the bill was good. And then England early saw the wisdom of providing a discount market and helping the discounting of trade bills. All these things made for a wide use of the acceptance, which, says the pamphlet "Acceptances," already referred to, "long ago proved ample to meet all the requirements of commerce and trade. Indeed, it constituted a long step in the upbuilding of commercial banking in Europe. In every sense a commercial document, the acceptance established a system under which commercial credit assumed a position of pre-eminence as a controlling attraction for liquid capital."

Development of Acceptances in the United States.

It seems strange that with the use of so successful a medium of finance as the acceptance abroad, up to a few years ago its service was denied this country. France and Germany had developed their own markets, and though these markets did not compare very favorably with the market for acceptances, and consequent encouragement of national trade, that England had developed, there was a general use of acceptances all over Europe. It was because London had become the money centre of the world and commanded the world's gold supply, on which all trade in the last analysis is based, that England outstripped her rival countries. It was London that was best able to and did provide a general discount market. Hence it has almost always been the

English bill, the draft payable in pounds in London, that has proved the most desirable the world over; because whoever owned it could sell it for cash at any time, if it was good, more readily than any other kind of a bill. Nothing succeeds like success. Once established, the spread in general desirability between bills drawn in pounds on London and other bills became considerable. Poor New York was quite out of it; and when in 1914 our banking laws were changed so that we could make use of acceptances and could possibly provide a discount market for them where the holder could sell them for cash, bills drawn on New York in dollars did not at once prove very popular. It was only when, owing to the Great War, New York and the United States more nearly commanded the gold supply of the world that it proved possible to encourage greatly the use of the acceptance form of borrowing in this country. We are now paying more and more attention to this important specialized form of finance. It is bound to grow very considerably in its use and in its service, and all should study it, make use of it when it is of advantage, and foster it, both for selfish reasons and to aid the United States in developing an important instrument in its foreign and domestic trade.

English Development of the Acceptance.

The British importers being the ones who first developed the acceptance, because of their ability to do so, it followed that it was British importers who naturally passed on the value of trades similar to