Acceptances, trade and bankers'

Front matter

JIttiaia, ST. 1.

2iibtary

Acceptances, trade and bankers'.

Preface

The endeavor in this volume is to offer simple and practical explanation of acceptance principles and procedure, as demonstrated in actual use by great numbers of bankers and business concerns in the United States and foreign countries. Eeseareh has not been spared in its preparation, and it embodies the results of several nation-wide cooperative investigations. There will he found herein a full discussion of the practical scope and limits of bankers ' and trade acceptances and, from a consensus of opinion, their most approved methods of use. It is hoped that the basic principles discussed and the plans and details of ^procedure described may enlighten the student, assist the banker, and enable the American manufacturer, jobber, or merchant to understand and apply the acceptance in its best form.

In banking houses it has been found that the most successful method of handling a specialty, such as bankers' or trade acceptances, is by delegating such an activity to one or more men who, through study and experience, become experts in its efficient management. It is probable, however, that in the case of acceptances, all officials of the bank who may be called upon to discuss the matter with customers or financial men, in its broad aspects or in details, can receive benefit from studying the practical information contained in a volume which covers all aspects of the subject. Although bankers, bank officials, and heads of departments in the banks are especially well posted on financial technicalities, yet progressive bankers find it necessary to study every day more closely the problems vi PREFACE

and experiences of their customers. The discussion of principles, as well as the consensus of experience of hundreds of actual users, offered in this book will be of exceptional value to any individual in a bank whose duties include the handling of acceptances with customers.

Any business firm studying the subject of acceptances will find in this volume data of the highest importance to the general manager, who must pass on it as a "policy," the treasurer, the controller, and the credit managers who must put the acceptance policy in force. The book will be of equal value to the sales manager, to the publicity manager, and to every salesman, who will hear more and more of the subject and who should be able to discuss it intelligently.

Although plans were devised by the Federal Reserve Board several years ago to make easy and practical the acceptance methods in certain classes of credit transactions,, in order to save the American business world time and money, its adoption was not immediate, except by those who are the natural leaders in improved business methods. "Acceptances," "bills of exchange," "trade bills," or "bills," as they are variously called, have been for years as generally well known, used, and liked in Europe as they have been neglected in America since the Civil War. Yet that argument alone has had small effect with the average American firm, notwithstanding the fact that more labor saving devices and mechanical methods have been invented, improved, and adopted by American business men than by all the European nations combined. The business mind and vision of many of our best bankers and business men, however, seem to have expanded with remarkable rapidity Tinder new conditions developed by the World War, in a way that gives promise of a great future for our business organizations. This book probably will not interest the man who is too old, or too obtuse, to learn new things, but

PREFACE vii

it should be of value to those who seek to understand new methods and who do not hesitate to adapt them to their needs.

Can America, although the richest country in the world, afford to overlook any improved method of handling its annual production of billions of dollars' worth of agricultural and manufactured commodities, most of which, at one time or another, are carried on credit? Through careful study by the best class of American bankers, business men, and students of finance, it may be expected that all possible benefit will be derived from the ' application of acceptances to liquefying and improviiig our cre^iits. Thus will America be put in the running for the great trade prizes to be won by the nation which uses the swiftest and surest financial methods.

It is the sincere wish of the author that this volume may contribute to the proper understanding and practical use of acceptances, wherever they can serve a useful purpose.

Park Mathbwson.

Contents

PAQE

Preface v

Part I Acceptance Theory, Procedure, And Practice Chapter

I. The Theory op Acceptance Payment

II. What Is a Trade Acceptance ....

III. Acceptance Procedure in Canada and Europe

IV, Acceptances in the United States .

V. How to Install Trade Acceptances in a Whole. SALE Business . . . .

VI. Simple Trade Acceptance Methods, Terms and Forms

VII. Satisfactory Methods op Recording Trade Ac ceptances and Checking Results

VIII. Sound Accounting Methods for Handling Trade Acceptances by Seller and Buyer

IX. Instructions and Letters to Salesmen and Cus

TOMBKS, AND HoW TO HANDLE THEM

X. Various Channels for Handling Acceptances

XI. General Methods op Collecting or Discounting Acceptances through the Banks

XII. Should Inducements Be Given to Buyers to ' ' Ac CEPT"

11 24 37

185 95

XIII. The Trade Acceptance and the Retail Merchant 127

XIV. Bankers' Acceptances, Definition and Functions 134

XV. Bankers' Acceptance Methods] and Forms op

liEADiNG Banking Institutions .... 144 t CONTENTS

CHAPTBB PAGE

XVI. Eecoeds op Acceptances Kkpt within a Banking

Institution 158

XVII. Investigations by Questionnaire or Trade Acceptances 183

PAET II

KULINGS AND OPINIONS OF COUNSEL OF THE

ACCEPTANCE PEOCEDUEE

XVIII. EuLiNGS OP the Federal Eesbrye Board . . . 197

XIX. Opinions or Counsel op the Federal Eeserve

Board 212

PAET III

DATA FOE TEADE ACCEPTANdE CAMPAIGNS

XX. What Can the Trade Acceptance Do for the

American Business Man 261

XXI. Acceptances and MANurACTURER- and Wholesaler 268

XXII. Trade Acceptances and the Eetailer . . . 285

XXIII. The Ultimate Consumer 301

XXIV. Putting the Trade Acceptance into Effect

THROUGH Trade Organizations . . . .309

XXV. Points op View op Buyers Who Hesitate to ' ' Ad-

XXVI, Making Clear to t:b:e Buyer the Advantages of

Index to Eulings and Opinions op Counsel op the Federal Reserve Board 344

Indhx 358

ILLUSTRATIONS

riQUBE FAGB

1. Trade Acceptance Form of the American Acceptance

Council 15

2. Trade Acceptance Form of the National Association

of Credit Men 18

2a. Reverse of Figure 2 19

3. Standard Form Trade Acceptance Designed by the

Business Bourse ....... 20

3a. Reverse of Figure 3 21

4. 5, and 6. Typical Drafts or Acceptances of a

Canadian Manufacturer 27

7. Acceptance Register or Record of Bills Receivable

of a Canadian Manufacturer ... 28, 29

8. Typical Canadian Draft or Trade Acceptance Form 30

9. Trade Acceptance Form Filled in for Acceptance

by Buyer 54

10. Reverse of Form Shown in Figure 9, Filled in for

Acceptor's Record 55

11. Trade Acceptance Register for Drawer (Seller) . 62

12. Trade Acceptance Register for Acceptor (Buyer) . 63

13. Standard Check-Up Sheet for Recording Trade Ac-

ceptance Results 66

14. Trade Acceptance Daily Record Form ... 68

15 and 16. Typical Bankers' Acceptances in Foreign

17. Bankers' Acceptance Form for Domestic Trade . 149

18. Bankers' Acceptance Form Designed by the Ameri-

can Acceptance Council 151

zi xii ILLUSTRATIONS

PIGUBB PAGE

19 and 20. Trade Acceptances Eecord Sheets of the

Bank of California 160

21. Acceptance Form Eeeommended by the American

Bankers' Association Committee .... 164

22. Triplicate Acceptance Collection Blanks Eeeom-

mended by the American Bankers' Association

Committee 165

23. Collection Notice Eeeommended by the American

Bankers' Association Committee .... 166

24. Acceptance Application 171

25. Bank's Eecord of Acceptances Maturing . . . 171

26. Bank's Instructions for Discount .... 172

27. Bank's Memorandum of Discount .... 172

28. Bank's Credit Ticket 173

29. Loan Division Acceptance Eecord .... 173

30. Bank's Eecord of Acceptances Purchased . . 174

31. Endorser's and Drawer's Liability Eecord . . 175

32. Acceptor's Liability Eecord 175

33. 34, and 35. Bank's Eecords of Acceptances Pur-

chased or Sold 176

36. Bank's Collection Eecord 177

37. Bank's Interest Eecord 178

38. Duplicate Eecord Forms for Various Departments 179-180

39. Simple Form of Duplicate Eecord Used by a Dis-

count House 181

40. Form of Eetail Trade Acceptance in Use in Joliet,

Illinois 288

41. Form of Trade Acceptance Made Out by Eetailer

and Accepted by Consumer 296

41a. Eeverse of Figure 41 297

INTRODUCTION

It was the business men, as well as the bankers, of the country whose demand for scientific banking legislation brought forth the Federal Reserve Act — a great business, as well as a great banking, law.

Here we find for the first time in Apierican banking that true commercial paper is given its rightful place; that, except United States Government securities, it becomes the most desirable investment for the banker, forming as it does a secondary reserve, the most liquid in his portfolio. It is through this paper indeed that the banker can make available for his own safety and for the service of his clients the resources of the whole Federal Reserve System, not only those of his own reserve district but of all the other reserve districts as well.

The banker naturally wants all the business paper he buys, so far as possible, to meet the requirements of the law, which will make the commercial paper he buys unquestionably available as a secondary reserve. But this has laid on business men, in turn, a condition that they so conduct their affairs that the paper they offer the bank shall conform with the requirements of the Federal Reserve law as interpreted by the Federal Reserve Board governing paper that can be rediscounted or bought by the Federal Reserve Banks.

The Federal Reserve Board soon after being organized, in its work of interpreting the Act which created the Board, indicated a preference for commercial paper that would show on its face that it arose from a current merchandise transaction, a true bill of exchange; and this

XIV

INTEODUCTIOlSf class of paper the Board styled, in order to make it distinctive, the "trade acceptance."

The trade acceptance lies close to the very heart of the Federal Reserve System, for without it or .related business paper the Federal Reserve System cannot properly function for the welfare of business; hence bankers and business men should thoroughly understand this ancient instrument which but recently has entered into American commerce.

It is well that this volume, treating of the acceptance in its many aspects, has been offered to the public by one who has studied profoundly the needs of business in its manifold relations, and particularly in its relation to banking, always with a view to finding a way to meet the need. The happy combination of the theory of the trade acceptance with practice under the acceptance system has been in these pages particularly well worked out, and the book makes an addition of inestimable value to the list of business books. It were highly advantageous if bankers as well as business men should catch the true spirit of the acceptance as presented in these illuminating pages of description and definition.

William Walker Ore

PART I

ACCEPTANCE THEORY, PROCEDURE, AND PRACTICE

Chapter I The Theory Of Acceptance Payment

Acceptances and the Credit System. — ^Payment by acceptance is as old and as broad as trade on the seven seas of the world. Ever since pure barter of one article for another was superseded by the modern system of buying and selling with credit given and taken in the business transaction, the method of paying by "acceptance" has been in vogue. The giving and taking of credit is one of the essentials of payment by acceptance, and it thus has no place in the buying and selling of goods for cash. A transaction on credit must be paid in the future, and the acceptance is one of the oldest and most efficient methods of definitely providing for a means and time of such pay- ^rnent.

As credit consists mainly of two elements, time and confidence, the trade acceptance, although it may be as liberal as seems desirable in regard to the time element, yet maintains the element of confidence in the highest degree by a fair "give-and-take" arrangement in which the seller signs a paper (trade acceptance) specifically agreeing to give certain terms to which the buyer has agreed as satisfactory at time of purchase. The buyer, simply as a fair return for the agreement and the valuable goods which the seller has delivered to him on his credit, countersigns or "accepts" the paper, thus signifying that the terms are satisfactory, that it is his desire and intention to live up to his end of the bargain he made when ordering the goods, and that he, equally with the seller, is, willing to evidence his good faith by also putting his name on the acceptance. When the instrument is accepted by a banker (bankers' acceptance), his indorsement usually tends to enhance the element of confidence in the credit transaction.

Early Use of the Trade Acceptance. — The operation of acceptance credit and payment is graphically illustrated by the early methods and necessities that brought them into being in the interchange of goods, both locally and between different countries. Although this method of payment dates back to early European trade, let us draw our illustration of its use from the early days of the American Colonies.

Great Britain might ship a cargo of needed goods to the Colonies. On arrival the goods would be presented to the local merchants or trading companies, together with an itemized bill, which bill would be "accepted" by the American purchasers for payment at a certain date in the future, usually in England, the country whence the goods came. Often tobacco, skins, or other American goods would be conveyed on the return voyage of the same ship in which the goods had come to America and in which the ^'acceptance" for the original cargo was returned to England. These goods were not sent for barter or in exchange ; they were consigned or were sold outright on their arrival in ,England, either for cash or for an acceptance by the English buyers, and the proceeds were used to liquidate the acceptance of the colonial merchants given for the original shipment of goods.

Hence it is apparent that, even in the early days, acceptances were used almost as a form of currency which enabled buyers and sellers to do business without the actual transfer of gold, Furthermore, the sale and purchase of jgoods on acceptance were not confined to international trade, or even to interstate trade, but were resorted to locally. As banks or banking houses in those days sel-

THEORY OF ACCEPTANCE PAYMENT 5

dom intervened in such transactions, these early credit papers were the same as the present-day foreign or domestic "bill of exchange" or "trade acceptance." The acceptance of the draft by a bank or banking house, -which is now almost universally the practice in the settlement of international trade, came centuries later, after the establishment of a banking system and its connection with commercial business, which have gradually developed our present-day efRcient settlements in foreign and domestic commerce.

From the foregoing illustration it will be seen that the theory of acceptance payment is not a new one in the world, and in fact, not new even in the United States. ^Acceptances were quite generally use.d by our merchants, even in domestic transactions, up to the Civil "War in 1861. During the practical disuse of the acceptance system under our banking laws for over half a century, however, new generations have grown up, unaware of the old systems and methods. Careful study of the theory and methods of acceptance payment, since its rehabilitation under the Federal Reserve Act, has again become profitable, not only by students of finance, but by all those practicing or interested in actual merchandise credit transactions.

How the Acceptance Theory Is Put into Practice. — As the application of the theory of acceptance payment is practically the same for all classes of acceptances, it may be readily explained by a discussion of a simple buying and selling transaction on credit between domestic merchants, settled by a paper named by the Federal Reserve Board a "trade acceptance."

Payment by trade acceptance is resorted to, for instance, when a manufacturer or jobber desires to sell goods on credit to a merchant or consumer, but desires also to have some tangible documentary evidence of such sale and for its settlement. A, the seller, gives credit to B, the buyer, and B acknowledges sueh credit and settles -for the goods purchased by "accepting" a trade bill or trade acceptance. This obligation, payable for a certain Sum at a certain date in United States money, is in full settlement of the debt, which the buyer finally liquidates by paying the amount of the trade acceptance on its due date at the bank or other place he therein designates for payment.

Acceptance payment, however, goes still further, in allowing the drawer .of the acceptance to realize upon this credit or debt, under proper conditions, through the usual banking channels. The debt thus becomes "liquid," and the drawer of the acceptance is enabled to extend or operate his business without the necessity of borrowing simply on his own credit. He uses the credit of the acceptor while putting his own guarantee thereon, and furthermore, in theory, behind the transaction lies the value of the goods constituting the purchase and sale, of which the trade acceptance is the written evidence. Thus A, by selling on credit, does not become the banker of B, but, having obtained the buyer's acknowledgment of acceptance of the debt, he can sell this acknowledgment, with his indorsement and guarantee thereon, to a regular banking institution and thus liquidate the commercial credit. The banker can pass this commercial paper on through the Federal Reserve Banks, which, in turn, can issue currency against such "eligible" acceptances. Thus the cycle of liquidated credit is complete. The theory of acceptance payment, therefore, is that, under proper conditions, all commercial Tjredit transactions will, through acceptance payment and discount, liquidate themselves completely. Acceptance payment thus assists the full and free operation of merchandise credit sales.

Care Necessary in Application of Acceptance Theory. ^ — Obviously it is as necessary to consider the element of safety in granting credit under acceptance payment as it

THEORY OF AGCEPTANCE PAYMENT 7

is in any other credit transaction. An acceptance given by an irresponsible acceptor, or one indorsed by a drawer who, through carelessness or dishonest means, will not do his part in the liquidation of the acceptance, is an ever present risk in credit transactions by a,cceptance. The exercise of care and the establishment of proper safeguards by seller and banker are just as necessary on acceptance credit as on any other class of sale, discount, or loan. Hence, in studying in theory or in practice, acceptance payment, it is essential for safety to consider all aspects from a conservative standpoint. This warning should not be taken lightly by those who are too readily prejudiced in favor of acceptance theory, for although the principle is absolutely sound and practical, yet careful judgment is essential to its proper application and highest success.

The open account and cash discount are little used in foreign countries, compared with their almost universal use in business transactions in the United States. Some business men in this country have vigorously attacked the trade-acceptance system on the ground that its use, under certain conditions, is not an improvement on the open-account and cash-discount system, to which they attribute the healthy and enormous growth of trade in this country. They argue that the theory of acceptance payment, if put into universal practice, would replace our present system of cash and credit, and thus would break up the cash-discount system, which they believe to be a valuable asset in our business organization. They also hold that the acceptance, if put into general practice, would tend to extend the time of credit, and in so far as it encouraged 100 per cent discount at banks, would also tend to an undue inflation in general credit. The principal exponents of this view are found among the jobbers and those who rely on the cash discount as an important element of profit and who limit their customers' credits to approximately 30 days.

The arguments for and against the theory of acceptance credit will not be enlarged upon in this chapter. Varying views on this subject, as set forth by their sponsors, are presented in later chapters for the consideration of those interested in all views on the acceptance It may be pointed out here, however, that any theory or practice, be it good or bad, can be exaggerated, and that the methods of cash discount, if handled in an unsound manner, can be carried to an extreme as readily as the acceptance system. Furthermore, when unwarranted or improperly handled by merchants or bankers, credit, under any .conditions, may be unduly extended and inflation be encouraged, whatever the medium of exchange.

Acceptance Theory Generally Indorsed Abroad. — The acceptance system of credit, modified more or less as employed in various countries and under different conditions, is commented upon by a banker prominent in international trade as follows :

Banks in the United States with international connections have for years taken advantage of the open discount markets of the large financial centers of Europe, and American houses doing an export and import business would have found it impossible to have financed the tremendous volume of imports and exports if they had not done so.

London for years has been the financial center of the world, largely due to the existence in that city of an open discount market, the result of the use of what in England are termed "bills," ■which are known to us as bank acceptances and trade acceptances.

Just prior to the war it was estimated that at least $3,000,000,- 000 of these short-time bills were in circulation in the London market. The existence of this open market has attracted idle funds from all parts of the world, which insures ample supply of capital for the use of English merchants and banks at low rates of discount. The banks of England invest in high-grade commercial paper upon which they can readily realize in ease of need through the rediscount facilities that are thus provided.

THEORY OF ACCEPTANCE PAYMENT 9

As ■will appear in later chapters, the acceptance theory is the same for the trade acceptance as for the acceptance of -which a bank or banking house is the acceptor. The difference is only in detail, in the matter of the acceptor, in that, whereas a trade acceptance is a paper representing a transaction between merely a buyer and a seller, the bankers' acceptance represents a transaction in which not only is merchandise sold, but usually the paper is drawn by the owner or seller and the banker's name is indorsed thereon as a guarantee of the payment of the acceptance.

An acceptance is the same whether it represents a domestic transaction, in which both buyer and seller are in this country, or a foreign transaction, in which one or more of the parties thereto is located in another country. Acceptances are quite universally indorsed in foreign countries and "bank bills," or "trade bUls," in various forms are used to a much greater degree tlian they are in the United States. Their use in foreign countries will be more fully dealt with in other chapters.

There is no question that the bulk of the world's acceptance business is done through acceptances accepted or indorsed by banks. This is especially so in international trade, for it is stated that probably a total of 75 per cent of the world's foreign commerce is financed at some time or other by means of banker's acceptances. Each class of acceptance has its proper sphere and application.

Common Practice Necessary in World's Intercourse. — The consensus of opinion among the large commercial nations on the availability and value of the acceptance theory and practice leaves no doubt that the United States will find advantage in the study of acceptance methods, to the end that they may be applied wherever it is found that their use will facilitate or improve the credit transactions of the nation's commerce.

It is apparent that we are coming into closer relations

■will all countries, not only politically and economically but also in trade, and that we should either standardize our methods with theirs or arrange that they standardize theirs with ours, to accomplish the greatest good for the greatest number and facilitate the most complete and satisfactory intercourse.

Nothing in the way of prejudice and ignorance should prevent the most rapid and efficient advance of commerce in this country and with the other countries of the world.

It therefore seems apparent that all students, economists, and business men should find benefit in the careful study ot acceptance theory and practice. -Succeeding chapters will go into the details of common practice and methods now in use in creating, handling, recording, and discounting bankers' and trade acceptances.

CHAPTER 11

^ WHAT IS A TRADE ACCEPTANCE?

The very fact that the trade acceptance is proving valuable in its appointed field should "warn against ascribing to it powers or functions which it does not possess. It has no magic which, by mere "acceptance," can convert an undesirable credit into a good one, or usurp the functions of, or do away with, the judgment of the credit man, of the seller, or of the bank.

The trade acceptance cannot make a bad account good, but its use should make good accounts prompt pay, and also enable the holder to realize on them comparably with cash. To the banker it is an augury of the use of better business methods by his clients, and to the business man, large or small, it may prove a convenience and a safeguard of great worth in smoothing out credit worries and failures by contributing to the more satisfactory standardizing of credits, as well as by advancing the education of the smaller merchant in the best business methods.

As described at length in succeeding chapters, this simple cheek-like paper, christened by the Federal Reserve Board the "Trade Acceptance," is lised only in credit transactions that concern the purchase and sale of goods. It cannot be given for borrowed money or past due accounts, but must represent only a current transaction, in order to be eligible for handling by Federal Reserve Banks. The description "goods" covers goods, wares, merchandise, and agricultural products, including livestock. The trade acceptance has no relation to cash transactions on short-term basis.

In brief, the trade acceptance is a simple, efficient means for enabling most business, men to close a transaction cleanly in one operation, and thus make it possible for them to give more of their time to the creative, side of their business and less to the costly and non-productive matter of collections.

Introduction of the Trade Acceptance in .the United States. — This instrument was inaugurated as a help to business and banking in the United States by the Federal Reserve Board in its ruling defining a trade acceptance, promulgated July 15, 1915, which communication officially states :

The attached regulation is to deal with "Trade Acceptances" as a distinct class of commercial paper fo"r which the Board is ready to approve the establishment of a discount rate somewhat lower than applicable to other commercial paper.

In its "first word" the Board apparently placed this new member of the credit family in a class by itself. The Board goes still further in its introduction and says that the

Board expresses the belief that it (the tirade acceptance) will considerably enlarge the scope of service of Federal Reserve Banks and incidentally assist in developing a class of "double name" paper, which has shown itself ip so many countries a desirable form of investment and an important factor in modern commercial banking systems.

Thus is ascribed to the trade acceptance the potential possibility of enlarging the "scope of service" of the Reserve Banks to th^ commercial world at large. It is also defined as a kind of paper which has shown itself a "desirable investment" in many countries as well as an "important commercial banking factor."

It is natural that the commercial world should give consideration to a new credit instrument to which no less a body than the Supreme Court of Finance of the United States — the Federal Reserve Board — ascribes so manydiverse powers of benefit to American banking and business.

Following the lead from headquarters, certain bankers took up the propaganda for prompt adoption of the trade acceptance. They generously gave aid by speeches and articles, setting forth the benefits to be derived by the commerce of the country by substituting the trade acceptance method of giving credit for the old open account system, which has so long held sway in the United States.

To the National Association of Credit Men can be ascribed the first organized effort to enlighten the business mind of the country as to the benefits of the trade acceptance in liquefying the four billions of frozen open-account credits of the country. Following the credit men's lead, the live captain of industry began to inquire, "What is this trade acceptance I hear and read so much about?" When he sought for a simple or detailed explanation he was not over-well rewarded, unfortunately, because most of the first pamphlets on the subject were published speeches or technical treatises by bankers or credit men, who naturally did not speak in the every-day business terms of the ordinary merchant or manufacturer.