Credit Policies of the Federal Reserve System
XII: Liquidity of Commercial Bank Assets the Acceptance Market
CHAPTER XII
LIQUIDITY OF COMMERCIAL BANK ASSETS THE ACCEPTANCE MARKET
In Chapters XII and XIII we consider the policy of the System with respect to the types of credit instrument which Reserve Banks will either accept for rediscount or purchase in the open market, and the influence which the System has had on the composition of the portfolios of member banks. This subject breaks up into two parts, first the stimulation of the use of acceptances, and second the influence exerted on banks’ lending practices through the standards of eligibility of paper for rediscount. The latter topic will be considered in Chapter XIII; here we examine the policies of the Reserve system which have had to do with the development of an acceptance market in the United States.
European banking practice, in contrast to our tradition, has always favored the use of acceptances or “bills.” An acceptance is an order for payment drawn by one individual or corporation in favor of another and addressed to a third individual or corporation (frequently a bank) and “accepted” by the drawee.1 A draft drawn by the seller of goods on the buyer is known as a “trade acceptance”; and a draft drawn on a bank and accepted on behalf of a client who has made the necessary arrangements with the bank, is known as a “bank acceptance.” Though such drafts are sometimes based on the individual credit of the drawer or of the client for whom the bank accepts, the rule is that an acceptance is based on an individual transaction in the marketing of goods and is to be liquidated out of the proceeds of the completed transaction.2
Bank acceptances are usually accompanied by shipping and other documents which evidence the commercial character of the transaction and make it impossible for the buyer to obtain possession of the goods until the draft has been properly accepted. Partly because acceptances always bear two or three names, but chiefly because of the intimate connection between the credit instrument and the underlying commercial transaction, European banking tradition regards the acceptance as the safest and most liquid of commercial instruments. In European central banking tradition the purchase of acceptances has long been regarded as the most appropriate means by which central banks may put their credit into the market.
At the time when the Federal Reserve system was created, neither the bank acceptance nor the trade acceptance had any important place in our financial system. American pre-war practice favored the use of single-name promissory notes not backed by documents evidencing individual transactions. Such notes might be secured by the deposit of marketable collateral or merely by the general credit of the maker. Collateral paper was used chiefly, but by no means exclusively, in the financing of the speculative and investment security markets. Short-time borrowing for commercial and industrial purposes was done in two principal ways; namely, by the sale of commercial paper through note brokers, and by borrowing on a single-name note over the counter of the borrower’s own bank. Over-the-counter credits might or might not be secured by collateral, but if they were secured the collateral ordinarily had no specific relationship to the transaction which the loan was intended to finance.3
“The pre-war system of trade financing (which is in most respects the same today) may be described as follows: In wholesale trade goods were generally sold on a basis of credit, with a discount for cash payment. Probably the most frequent arrangement was 60 days’ credit, with 2 per cent discount for payment within ten days. Banks financed trade on the basis of single-name promissory notes, paying little attention to individual transactions unless the latter were very large. So far as the buyer’s credit permitted, he borrowed at the bank and took cash discount, the savings normally amounting to more than twice the bank interest. Sellers borrowed at the banks to obtain funds to carry those customers who did not take cash discount. In either case the assets were ordinarily not pledged but merely listed in a statement of condition, though in the financing of staples there was a considerable amount of lending on the collateral security of warehouse receipts and bills of lading. In the case of small corporations the personal endorsement of officials was often required. The bank was safeguarded by the requirement of a normal ratio of quick assets to current liabilities; the most frequent requirement being two-to-one. The net working capital, that is the difference between quick assets and current liabilities, had to be obtained by the investment of the proprietor or by the issuance of long-time securities.
Under the system in vogue in Europe, as we have stated, a large proportion of trade is financed by the use of acceptances representing the purchase price of goods. These acceptances are discounted at the seller’s bank; or a bill accepted by a bank for the account of the buyer is sold in the open market. The former practice, known in America as the trade acceptance system, is applicable on the Continent to small domestic bills; the latter, the bank acceptance system, centers in the London market and is chiefly important in the financing of international trade where the individual transactions are larger and the underlying goods can be more readily levied upon and sold in case of default.
Obviously the discounting of a bill makes it regular practice to extend larger credit on the security of a given lot of goods than is the case where the borrower has to show a two-to-one ratio of quick assets to current debt. This does not necessarily mean, however, that under the American system the banks do a smaller proportion of the total financing. For the equity represented by the excess of current assets over current liabilities can be obtained by selling securities, and these securities to a very large extent are either bought by the banks as investments or carried by the banks as collateral for time and call loans to speculators. From the standpoint of the banker’s need for a liquid investment, the American call loan is the counterpart of the European acceptance; while from the standpoint of the industrial borrower the fact that he can issue securities which are carried directly or indirectly by banks makes up the difference between the 100 per cent credit he might have gotten by discounting a buyer’s acceptance and the 50 per cent credit he could get if the bank loaned him funds to carry on his business on the basis of a two-to-one ratio. Obviously, however, the American system is more favorable than the European to the organization of business in units sufficiently large to make possible access to the open market for investment instruments.4
Following the creation of the Federal Reserve system there was organized a propaganda movement, having as its objective the popularization in the United States of both the bank and the trade acceptance. As is usual with propaganda movements, the claims made for the European system were a mixture of sound sense and wildest nonsense. It is unnecessary to recount the history of this effort, so far as the trade acceptance is concerned.5 Suffice it to say that the trade acceptance proved a complete fiasco.6 The labor and red tape involved in handling acceptances proved a serious obstacle. Banks quickly grew fearful that the acceptance was merely a way of getting bigger loans on the same security—which was a fair inference from much of the propaganda literature. And in fact the buyers who were enthusiastic proved to be chiefly those who hoped to obtain larger credit lines than had been hitherto open to them.
The history of the bank acceptance was entirely different. The active efforts of reformers in this country were reinforced by world financial conditions which were very favorable to the transfer to New York of a considerable fraction of the acceptance business formerly handled through London. For a number of years the United States was the only leading nation with a stable currency. Later, as the stabilization movement gained headway, a new market for American acceptances opened up in the form of gold exchange reserves of Continental central banks. Finally, the Reserve Banks threw the weight of their influence very effectively back of the movement to build an acceptance market in the United States.
The Reserve system has made strenuous efforts to develop a market for acceptances. In pursuance of this policy the Reserve Banks stand ready at all times to purchase eligible bills at fixed rates in any quantity in which they may be offered. Although the purchase of an acceptance by a Reserve Bank is generally called an open market investment, it is really more closely akin to a rediscount than to other open market operations. Any bank which has eligible bills can replenish its reserves by selling the bills to the Reserve Banks at the published rates as certainly as it can secure funds through rediscounting its commercial portfolio; hence the Reserve Banks can control the volume of their credit issued through the acceptance market only in the way that they control the amount of rediscounts, that is, through changing their buying rates. As was shown in Chapter XI, the quantity of reserve credit outstanding does not respond readily to control of this kind. Purchases and sales of United States securities, on the other hand, are undertaken at the initiative of the Reserve Banks, which buy and sell at rates fixed by the market such quantities of securities as may be deemed necessary to produce the results aimed at.
The similarity between acceptance purchases and rediscounts must not be exaggerated, however. From the standpoint of a member bank the sale of acceptances or customers’ paper has the advantage that the funds so received are not shown in its reports as borrowings. Hence the expansion of credit through the acceptance route is not subject to the check which arises from the existence of a tradition against continuous rediscounting.
Special aid from the Reserve system for the acceptance market has taken four forms: first, special privileges to acceptance dealers in the form of “repurchase agreements”; second, endorsement of bills sold to foreign central banks; third, preference in the rates at which acceptances are bought as compared with rediscount rates; and, fourth, progressive lowering of the standards required for eligibility of acceptances for purchase.
Repurchase agreements afford dealers in acceptances direct access to Reserve Bank credit. The repurchase agreement, which is used both in the acceptance market and in that for short-time government securities, is an agreement between a Federal Reserve Bank7 and certain recognized dealers whereby the dealers may sell securities to the Reserve Bank under contract to buy them back within 15 days at a fixed price. The price is so adjusted as to net the Reserve Bank the same rate of interest which it would earn if it bought the securities outright. The willingness of the banks to buy acceptances at all times, either outright or under repurchase agreement, makes them more attractive investments for banks and greatly lessens the risks of dealers.
The legality of the repurchase arrangement was strongly questioned by members of the House Committee on Banking and Currency at the hearings on the Strong bill, on the ground that it was merely a subterfuge to cover what are really collateral loans to dealers who are not members of the Federal Reserve system.8 Question was raised also as to the desirability of an arrangement whereby dealers in acceptances and securities, who are in no case members of the Reserve system, are given unrestricted access to Reserve funds at rates as low as are granted by the Reserve Bank to member banks, whereas any other business concern can secure Reserve credit only at a higher cost through the intermediation of a member bank.9
W. Randolph Burgess has been the chief spokesman of the Reserve system in defending this system, both at the hearings in question and in his published writings.10 Mr. Burgess says:
The practice is for the dealer to borrow from day to day in the money market the money with which he carries his stock. Ordinarily, the bill dealer can obtain call money at a rate about one-fourth to one-half per cent under the quoted market rate for call money because of the type of security he offers. But there are often times in the money market when money is not available at low enough rates; at these times the bill dealer needs some place of refuge where he may obtain funds to tide him over the temporary period of stringency. The Federal Reserve Banks furnish that place, for they always stand ready to buy bankers’ acceptances at their current buying rates.11
A fuller statement of Burgess’ view is embodied in the following excerpt from the hearings:
Mr. Wingo. . . . This purchase and resale—what is the necessity and philosophy and influence that moved the Bank in establishing that custom?
Mr. Burgess. I would like to make three points on that, Mr. Wingo. The first one is that these dealers have a type of security which has a liquidity and a goodness which is totally different from the security of the business man. This paper in the bankers’ acceptance market has two banks’ names on it. The short-term Government manifestly is a security of the highest type so that the security is a very different proposition. The second point is that the existence of these markets is not only desirable, but is essential to carrying on a sound money market operation with central banks in the same way as they do in European countries. It is an essential way of giving elasticity to the money market and making possible a free flow of funds about the country.
We would have no American bill market and no market for short-term government securities if the Federal Reserve Banks did not have that arrangement.
Mr. Wingo. What is the reason?
Mr. Burgess. They cannot get the funds they require at a rate they can live on.
Mr. Wingo. The whole thing goes back to the rate, then?
Mr. Burgess. Yes, sir.
Mr. Wingo. The fact is you have one class of securities or people dealing with the Federal Reserve Banks that gets a preferential rate as compared with other interests in the country?
Mr. Burgess. Not compared with the member banks. Here is a group of bankers that are simply placed, because of the necessity of this operation, on a similar basis in getting funds with the member banks.
Mr. Wingo. . . . Why is it necessary? Why cannot that transaction, assuming that you are right—and I am inclined to think of course you are—that these bill dealers perform a very necessary function, if that is true, why cannot they come through the member banks just as any merchant can [assuming that it is legal] ?
Mr. Burgess. It is simply a matter of the mechanism, a matter of fact. They cannot get the money.
Mr. Wingo. The reason is he cannot get the money at a rate he will pay.
Mr. Burgess. At a rate he can pay and survive.
Mr. Wingo. Is not that true of any merchant in Washington? If the rate that the banks charge him makes it impossible for him, in competition with his competitors, to give a sufficient return, he has to go out of business.
Mr. Burgess. Yes; but the banking situation is such that some other fellow can survive in the same business. Without the aid of the Reserve Banks the whole business of dealing in bills is unprofitable.
Mr. Goldsborough. Do you mean the bill dealer can get rates from the Bank of England, and for that reason the Federal Reserve thought it necessary to set up these rates in order to compete with the Bank of England?
Mr. Burgess. Not compete with the Bank of England.
The Chairman. But do a business similar to the Bank of England?
Mr. Burgess. Yes, sir. The bankers’ acceptance business has proved a very valuable thing in England, a very important part of their money market.12
The case for continuous protection of dealers in acceptances against the risk of loss on account of a tightening of the money market is not on the face of things particularly convincing. The risk is one of the ordinary hazards of trade in financial instruments. A dealer in open market commercial paper, for example, has to carry a stock of paper on borrowed money. An adverse fluctuation in the cost of money may at any time wipe out the profits on the paper contained in his portfolio. Dealers in bonds and stocks run the same risk. It is all a question of rates. If the dealers had to protect themselves against adverse fluctuations of the money market they would have to have a somewhat wider margin of profit, or else work on a brokerage basis. If they cannot get an adequate margin of profit in the acceptance market, this means that the acceptance market does not, under American conditions, have sufficient vitality to carry its own costs.
The acceptance has tended to become more and more an instrument for financing transactions in which the turnover of capital is slow. The standard line of argument in favor of the acceptance as an ideal bank investment is that in the very nature of the case it is self-liquidating; that it is based on a specific transaction in an identified lot of staple goods; that it will be liquidated automatically as the goods are paid for; and that in case of difficulty the creditor can always take possession of the goods and sell them to satisfy his claim. The history of the acceptance in recent years, however, has been that as its use broadens it tends more and more to lose its distinctive character. In this connection the distribution of the total amount among bills of different classes is illuminating.
The accompanying table shows, both in totals and in percentage terms, the number of bills issued to finance imports, exports, domestic shipments, the storage of goods in domestic warehouses, goods “stored abroad or shipped between foreign countries,” and those issued to furnish “dollar exchange.” The only one of these items which requires explanation is the last mentioned—drafts to create dollar exchange. Section 13 of the Federal Reserve Act provides that any member bank may accept 90-day drafts drawn upon it by banks or bankers in foreign countries or dependencies of the United States “for the purpose of furnishing dollar exchange as required by the usages of trade.” Under this provision of the Act, the Board has authorized the acceptance of drafts drawn by banks or bankers in between 25 and 30 non-European countries.
A draft to create dollar exchange is simply the old finance bill13 under a new name—a device whereby a bank in the United States can make a direct short-term loan to a bank in a less developed country on no security other than the general credit of the borrowing bank. Such drafts have long played a useful part in the international distribution of capital, but there is no apparent reason why they need be encouraged by preferential treatment as compared with direct loans. Nor is it clear that there is any sound basis for a discrimination in this respect in favor of the banks of countries which are financially weak as against those which are financially strong.
Bankers Acceptances Outstanding, 1924-3114
Classified by Basis of Credit
I. In Millions of Dollars
| Class of Credit | 1924 | 1925 | 1926 | 1927 | 1928 | 1929 | 1930 | 1931 |
|---|---|---|---|---|---|---|---|---|
| Imports | 292 | 311 | 283 | 313 | 316 | 383 | 221 | 159 |
| Exports | 305 | 297 | 261 | 391 | 497 | 524 | 415 | 222 |
| Domestic shipments | 38 | 26 | 29 | 21 | 16 | 23 | 35 | 16 |
| Domestic warehouse credits | 162 | 103 | 116 | 197 | 174 | 285 | 271 | 251 |
| Goods stored abroad or shipped between foreign countries | 17 | 40 | 131 | 243 | 441 | 561 | 296 | |
| Dollar exchange | 23 | 19 | 26 | 28 | 39 | 76 | 52 | 31 |
| Total | 820 | 773 | 755 | 1,081 | 1,285 | 1,732 | 1,555 | 975 |
II. As a Percentage of Total
| Imports | 35.6 | 40.2 | 37.5 | 29.0 | 24.6 | 22.1 | 14.2 | 16.3 |
| Exports | 37.2 | 38.4 | 34.6 | 36.2 | 38.7 | 30.2 | 26.7 | 22.8 |
| Domestic shipments | 4.6 | 3.4 | 3.8 | 1.9 | 1.3 | 1.3 | 2.3 | 1.6 |
| Domestic warehouse credits | 19.8 | 13.3 | 15.4 | 18.2 | 13.5 | 16.5 | 17.4 | 25.7 |
| Goods stored abroad or shipped between foreign countries | 2.2 | 5.3 | 12.1 | 18.9 | 25.5 | 36.1 | 30.4 | |
| Dollar exchange | 2.8 | 2.5 | 3.4 | 2.6 | 3.0 | 4.4 | 3.3 | 3.2 |
| Total | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 |
The other groups which have the least claim to favored treatment, in accordance with the general theories advanced in the propaganda for acceptances, are those based on goods stored abroad or shipped between foreign countries, and those based on domestic warehouse receipts.15 However desirable it may be to encourage the holding of staple goods in warehouses for the sake of “orderly marketing,” and however great the ultimate safety of loans made in this connection, it cannot be claimed that such credits are directly self-liquidating. They do not arise out of completed transactions; they are a means of furnishing more or less permanent working capital; and they are held likely to have a speculative character. Nor is it as easy for the buyer of such an acceptance to check up on the value of the collateral or to protect himself in case of default as is the case in financing on “salt water” bills, in which the time of the credit corresponds to the time necessary for carrying through the trade transaction.
It will be noticed that these three doubtful items—domestic warehouse credits, dollar exchange, and goods stored abroad or shipped between foreign countries—which in 1925 made up only about 22 per cent of the total, had increased in 1929 to 46 per cent, and in 1930 to 59 per cent. Bills based on goods stored or shipped between foreign countries have been increasing especially rapidly since 1927, and by 1930 exceeded in volume those issued either in import or in export trade. However little importance one may attach to the self-liquidating character of paper—a point which we shall discuss in Chapter XVII—it can hardly be denied that the case for special favors to the acceptance market as against the commercial paper market is seriously weakened by the expansion of these elements in the acceptance market to one-half the total.
Moreover, the distinctive character of the other half of the acceptances is also being nibbled away. The law provides that a bill to be eligible for acceptance by a national bank as based on a shipment of goods in domestic trade, must be accompanied by shipping documents. In the earlier rulings this provision was held to mean that the purpose of the bill should be to finance shipment and not to enable a buyer to carry goods through the process of manufacture and resale after they had been delivered to him. Hence it was required that the life of the bill should have some reasonable relationship to the length of time required for shipment, and that the acceptance should not be used as a means of furnishing working capital to the buyer. But in a ruling of November 8, 1929,16 it was held that a buyer may, after paying a sight draft at a bank, and before the bank has turned over to him the shipping documents which accompanied it, draw a 90-day draft on that bank, have the acceptance discounted, and walk out with the shipping documents. So far as indicated, he may do this even though the goods have already arrived and are awaiting release of the shipping documents for delivery. Thus the provisions of the law which were designed to link up acceptance with actual shipment are completely nullified.17 In connection with this ruling the Board expressly called attention to the fact that it reversed the earlier rulings intended to prevent the use of the acceptance as a means of obtaining working capital. It is difficult to see wherein this ruling leaves any rational ground for preferential treatment of the trade acceptance over the single-name promissory note.18
Percentage Distribution of Bankers’ Acceptances Outstanding19
| Date | Held by Federal Reserve Banks | Held by Others | ||
|---|---|---|---|---|
| Total | For Own Account | For Foreign Correspondents | ||
| 1927: | ||||
| June 30 | 45.8 | 26.3 | 19.5 | 54.2 |
| Dec. 31 | 57.3 | 36.1 | 21.2 | 42.7 |
| 1928: | ||||
| June 30 | 51.1 | 21.1 | 30.0 | 48.9 |
| Dec. 31 | 63.3 | 38.0 | 25.3 | 36.7 |
| 1929: | ||||
| June 30 | 45.2 | 7.2 | 38.0 | 54.8 |
| Dec. 31 | 54.2 | 22.6 | 31.6 | 45.8 |
| 1930: | ||||
| June 30 | 45.7 | 9.7 | 36.0 | 54.3 |
| Dec. 31 | 49.3 | 21.1 | 28.2 | 50.7 |
| 1931: | ||||
| June 30 | 31.8 | 6.9 | 24.9 | 68.2 |
| Dec. 31 | 57.1 | 31.4 | 25.7 | 42.9 |
Reserve Bank buying rates on acceptances have usually been such as to attract to the Reserve Banks a very large fraction of the outstanding bills. The most important question in connection with the Reserve Banks’ policy toward the acceptance market arises in connection with the fixing of the rate. At most times the acceptance market in this country has depended for its very existence on the amount of favor shown it by the Reserve Banks. The table on page 258 shows how heavily the bill market has leaned on the Federal Reserve system.
The fact that the Reserve Banks stand ready to buy acceptances at a rate lower than the rediscount rate on commercial paper has been defended on the ground that the acceptance is a better security than rediscounted paper since it always bears the names of two banks,20 and since no question of renewal of obligation arises in connection with it, such as may arise with promissory notes. This point is, of course, theoretically sound, but in practice it is probably of no significance.21
The real point is that there has never been an independent demand for acceptances at rates which would call forth a sufficient volume of them to make a satisfactory market. Consequently, in order to encourage the use of acceptances, besides endorsing them for foreign buyers in the way already noted, the Reserve Banks have always bought a very large proportion for their own account.
A campaign to create a discount market in this country, however, can hardly be considered successful so long as the market requires constant nursing on the part of the Reserve Banks.22 Especially is this true so long as the commercial banks do not regard acceptances as attractive investments. There are no data as to holdings of banks, except for the banks of the New York District and for the accepting banks, which are in general the very large city banks. As the accompanying table shows, the member banks of the New York District have as a rule held very moderate amounts of acceptances. Moreover, more than half of these are bills which have been accepted by the same bank which holds them. Such “acceptances” hardly qualify as essentially different from simple advances over the counter. The Reserve Banks, other than New York, nearly all report that banks of their districts are not interested in buying acceptances, chiefly because the rates are unattractive.23 In 1930 and 1931 the market for acceptances was greatly strengthened by the shortage of commercial paper and by the general attempt of banks, and for that matter of individuals, to get their assets into highly liquid short-term form. The situation was so abnormal that it would not be safe to conclude that the acceptance has made a permanent place for itself of any such magnitude as the recent figures indicate.
From the standpoint of the buyer the acceptance must make its place in competition with two other types of instrument which offer the same combination of great safety and high liquidity,24 namely the Treasury certificate and the stock market call loan. The great mass of short-term United States government securities are fully tax exempt in the hands of banks and have the added advantage that the subscriber ordinarily is enabled to retain the funds for some time as a government deposit at a rate lower than is yielded by the certificates. Since such securities have as good a market as have the acceptances, the yield on acceptances would have to be substantially higher to make them equally attractive to the banks. As a result of Federal Reserve policy, however, the yield of acceptances has rarely gone above that of United States government securities by more than one-half of one per cent; the usual spread is about three-eighths. Except in times of very easy money, call loans yield a higher return than do other types of secondary reserve and the risk on them has so far proved to be negligible.
Acceptances Held by Member Banks in the New York Federal Reserve District, 1925-3025
| Date | Total | Own Acceptances | Acceptanccs of Others | |||
|---|---|---|---|---|---|---|
| In Millions of Dollars | As Percentage of all Loans and Investments | In Millions of Dollars | As Percentage of all Loans and Investments | In Millions of Dollars | As Percentage of all Loans and Investments | |
| 1925: | ||||||
| June 30 | 64 | 0.73 | 36 | 0.41 | 28 | 0.32 |
| Dec. 31 | 47 | 0.51 | 23 | 0.25 | 24 | 0.26 |
| 1926: | ||||||
| June 30 | 25 | 0.27 | 13 | 0.14 | 12 | 0.13 |
| Dec. 31 | 29 | 0.30 | 15 | 0.16 | 14 | 0.14 |
| 1927: | ||||||
| June 30 | 39 | 0.39 | 11 | 0.11 | 28 | 0.28 |
| Dec. 31 | 53 | 0.49 | 38 | 0.35 | 15 | 0.14 |
| 1928: | ||||||
| June 30 | 28 | 0.25 | 8 | 0.07 | 20 | 0.18 |
| Dec. 31 | 19 | 0.17 | 9 | 0.08 | 10 | 0.09 |
| 1929: | ||||||
| June 30 | 25 | 0.21 | 16 | 0.13 | 9 | 0.08 |
| Dec. 31 | 94 | 0.76 | 39 | 0.32 | 55 | 0.44 |
| 1930: | ||||||
| June 30 | 132 | 1.07 | 42 | 0.34 | 90 | 0.73 |
| Dec. 31 | 185 | 1.54 | 51 | 0.42 | 134 | 1.12 |
On the other hand, if rates were set higher so as to make the acceptances more attractive to banks and other investors, the supply of acceptances would probably dry up. The root difficulty seems to be that the commission charged by the accepting bank, plus the dealer’s profit, make such a wide spread between the cost to the borrower and the yield to the buyer that the acceptance market is less economical for most borrowers and less profitable for lenders than are other types of financing. For without a rate differential the acceptance market would not be a particularly attractive method of borrowing for firms which have access to other forms of open market short-term credit. To borrow through the use of acceptances involves more work and red tape and involves closer scrutiny of the details of one’s business on the part of lenders.
We conclude that in the financing of international trade in readily salable commodities, the acceptance probably has a real field of usefulness, in which it could stand on its own feet without official assistance. But nothing has been gained by forcing the acceptance form of credit into uses in which it cannot compete on its own merits. And so far as the one original purpose is concerned, namely that of making a fluid market through the medium of which funds could readily be shifted from one part of the country to another as demand and supply of credit shift—the acceptance market has been a failure. It was not needed for that purpose and has not served that purpose.
On June 27, 1932 a new effort to encourage the use of trade acceptances was launched by the Banking and Industrial Committee of Twelve, an organization of prominent business men which was formed to assist federal government agencies in furthering a credit expansion. At the time this volume goes to press it has not been indicated that the Federal Reserve Banks are making plans to support the trade acceptance market as they do the market for bankers’ acceptances.
- 1The distinction between “banking policy” and “credit policy” is taken from Annual Report of the Federal Reserve Board, 1928, pp. 9-10.
- 2Compare pp. 132-40.
- 3This is, of course, in substance the position of the Banking School in the British banking controversy of the early nineteenth century.
- 4“. . . When increased credit demands can be met only by recourse to the Federal Reserve Banks, the volume of Reserve Bank lending is a sensitive indicator of credit conditions. . . .” (Federal Reserve Bulletin, 1923, Vol. 9, p. 411).
- 5Annual Report of the Federal Reserve Board, 1923, p. 10 (quoted below, pp. 79-80); Federal Reserve Bulletin, 1928, Vol. 14, p. 6.
- 6The omission of reference to price changes in the text is intentional and without prejudice. I believe that there is need of a thorough reexamination of the orthodox statement of the influence of gold movements on price changes and the extent to which in pre-war days changes in price levels were caused by gold movements and operated to check the gold movements.
- 7For fuller discussion of these points, see Chap. IX; compare also B. H. Beckhart, The Discount Policy of the Federal Reserve System, Chap. II.
- 8The cash balance carried in the United States Treasury was occasionally drawn upon to meet seasonal or crisis demands, either through the depositing of funds in banks or through the purchase of bonds by the Treasury, but the device was very crude and there was no continuity of policy in its management.
- 9Compare chart, p. 35.
- 10The possibility of temporary nullification of a central bank’s control through the mobilization of fresh resources is illustrated by an action of the Midland Bank, which in 1927 bought securities so heavily as to lower its own reserve ratio by several per cent. The amount involved was small enough so that the Bank of England was able to offset it. The net result was simply to increase the earning assets of the Midland Bank and decrease those of the Bank of England; not to ease the market.
- 11Compare p. 231.
- 12Annual Report of the Federal Reserve Board, 1927, pp. 10, 16.
- 13See pp. 104-05.
- 14a Compiled from Annual Reports of the Federal Reserve Board and from Federal Reserve Bulletins, Vol. 18, pp. 186, 352, 358, 400.
- 15Annual Report of the Federal Reserve Board, 1927, p. 11.
- 16The 4 1/2 per cent rate was charged on all maturities of less than 90 days, such paper making up the great bulk of the transactions.
- 17As reported by the New York Stock Exchange.
- 18At least such a policy was promulgated by the Board. It is difficult to say how far the Reserve Banks went in carrying it out. Apparently the New York Bank did not give much heed to it; alleging, truly, that New York banks were not loaning heavily in the stock market. Compare p. 133.
- 19a Facts and Figures Relating to the American Money Market, p. 61; Federal Reserve Bulletin, 1932, Vol. 18, p. 105.
- 20Indexes of Standard Statistics Company.
- 21This increase is not altogether due to the rate change, as the supply of acceptances is always increased by autumn exports. The increase in 1929 was much more than seasonal, however.
- 22See 70 Cong. 1 sess., Brokers’ Loans, Hearings on S. res. 113 before Committee on Banking and Currency.
- 23See testimony of Cassel, Fisher, and Foster in Hearings on H.R. 78955 William T. Foster and Waddill Catchings, “Is the Reserve Board Keeping Faith?,” Atlantic Monthly, July 1929, Vol. 144, pp. 93-102.
- 24From July 31 to December 31 the increase in acceptances held was 327 million dollars. In no other years except 1924 and 1929 has the increase exceeded 235 million dollars, and usually it has been below 200 million (in 1924, 363 million dollars; in 1929, 329 million). Computed from data published in annual reports of the Federal Reserve Board.
- 25a Data on acceptance holdings from Hearings on S. res. 71, Part 6, p. 872; on total loans and investments from Annual Report of the Federal Reserve Board, 1930, p. 172.
