There are no fixed rules or infallible tests as to the granting of credit. It is, of course, essential that the borrower shall have a good business reputation and that he give evidence of his capacity to conduct his business efficiently. Also, he should have sufficient resources so that his borrowings may be only for his current needs. The financial statement furnished by the borrower (which is one of the bases for determining the quality of commercial paper) should be of as recent a date as possible. It will be of more value if it can be compared with previous statements in order to show how the business has progressed, and its analysis should show the ratio of quick assets to quick liabilities.

Domestic Acceptances

The financing of domestic trade has been considerably facilitated by the amendment to the Federal Reserve Act which permits banks to lend their credit on domestic acceptances, as well as on those growing out of exportations and importations. This should give a considerable impetus toward the conversion of book accounts into the highly desirable form of trade acceptances.

Trade Acceptances Defined

A "trade acceptance" is a time draft drawn by the seller of merchandise on the buyer for the purchase price of the goods, and accepted by the buyer, payable on a certain date at a certain place.

The latest official definition of a bill of exchange and a trade acceptance is in Regulation B, Series of 1916, issued by the Federal Reserve Board, as follows:

“A bill of exchange, within the meaning of this regulation, is defined as an unconditional order in writing, addressed by one person to another, other than a banker *, signed by the person giving it, requiring the person to whom it is addressed to pay

in the United States, at a fixed and determinable future time, a sum certain in dollars to the order of a specified person; and

"A trade acceptance is defined as a bill of exchange drawn by the seller on the purchaser of the goods sold, and accepted by such purchaser."

Bankers' Acceptances

The same regulation also explains a bankers' acceptance, as follows:

"A bankers' acceptance, within the meaning of this regulation, is a bill of exchange of which the acceptor is a bank or trust company, or a firm, person, company, or corporation, engaged in the business of granting bankers' acceptance credits."

In other words, the buyer of the merchandise arranges with a bank or other party to "accept," thus lending its credit for which the buyer gives satisfactory security and pays a commission.

Objections to Domestic Trade Acceptances

An analysis of the objections that have been advanced to domestic trade acceptances, as a result of several months' discussion, according to an address by R. H. Treman, Deputy Governor, Federal Reserve Bank of New York, shows that "most of them are based either on an over-conservative desire to cling to present methods, however crude and unscientific, or on a narrow viewpoint that sees only local, limited or temporary conditions, or (and this is perhaps the principal basis) on a total lack of understanding what the trade acceptance system is and how flexibly it can be accommodated to our business needs.”

Advantages of Domestic Trade Acceptances

The advantages that have been developed by the recent use of acceptances in the financing of domestic trade, and the principal reasons for their adoption are summarized as follows:

That the dead capital of open book accounts can be transferred into the live capital of trade acceptances, which are selfliquidating commercial credit paper available for the payment of debts, and which, when discounted like promissory notes, become a basis for the issue of currency and bank reserves under the Federal Reserve Act.

That trade acceptances show that they are the result of bonafide commercial transactions, and that, being two-name drafts, they are more likely to be paid at maturity than single-name promissory notes, and that, therefore, they are safer, more liquid and more desirable for bankers.

That the trade acceptance system is better than the open account system, because the seller has an acknowledgment in writing of the account and is therefore in a better position to enforce its collection. The use of acceptances will tend to reduce the percentage of loss by bad debts and save the interest on overdue.

accounts.

Instead of the manufacturer or jobber being obliged to borrow heavily to finance the retailer, thus acting as a banker for his customers, it places the distribution of credit with the banks, where it belongs.

That the tendency is for those who settle by trade acceptances to be regarded with preference, like those who discount their purchases for cash. Trade acceptances, moreover, minimize the practice of taking unearned or unauthorized discounts, curb the returning of merchandise, tend to stop the pernicious practice of assigning or hypothecating book accounts to secure working capital, thus reducing the overhead costs of doing business and enabling the manufacturer and jobber to sell at lower prices, at the same time bringing about a general improvement in the merchandising system by placing it on a sounder basis.

Finally, "that the Federal Reserve Board, recognizing the advantage of the trade acceptance, has authorized special rates of discount for this class of paper, and that all Federal reserve banks in establishing rates have made a rate generally 1⁄2 of 1 per cent. lower for trade acceptances than the rate for promissory notes."

The methods of financing certain specific lines of domestic business vary according to commercial customs that have become established in connection with each trade and industry. Raw material is financed by a bill of exchange with documents attached, which are released on payment of the draft, the right to the possession of the goods resting with the party to whom the bill of lading is endorsed. Banks hold the documents as collateral security for the loan, and are accustomed to extend such credit freely within the limits of a reasonable fluctuation in market prices. When the commodity is stored in a warehouse or, if grain, in an elevator, the bill of lading is replaced by a warehouse or trust receipt, a new bill of lading being issued when the commodity moves again.

Cotton

In the movement of the great staples, especially, the part the bank plays is essential and important, for it necessarily must advance large sums on credit. Cotton, for example, is largely handled on consignment by factors, who advance up to about 70 per cent. of its value and use the stored cotton as collateral for loans from the banks. Cotton also moves through brokers and middlemen to the mills direct, the bills of lading, with drafts attached, being taken by banks for collection and credit. In transactions between local buyers and large operators, methods may be varied somewhat according to the standing of the dealer in the staple.

The old custom of the cotton factor or merchant financing the planter is being gradually done away with through the growth of banking facilities in the South, the banks being able to extend the necessary credit at less expense to the grower.

Grain

The movement of grain is covered by means of bills of exchange which must be paid before the grain is delivered. Because grain usually changes hands many times before it reaches its final

destination, the control of the commodity, as evidenced by the bill of lading, elevator or trust receipt, is the principal essential. These form the basis of banking accommodations. As in cotton, while in the last analysis the commodity is the security, the credit of the borrower is also an important element.

Lumber

In the case of lumber, there are three principal forms of credit instruments: timber bonds, lumber receivables and single-name lumber paper. The bonds, together with private capital, are used to finance the manufacture of standing timber into lumber. The manufactured lumber moves from the mill to the wholesaler on bill of lading, with draft attached, or on open account. Much of the lumber business is done on the latter basis, but trade acceptances are also coming into use.

The uniform bill of lading act, which went into effect January 1st, 1917, gives banks additional protection as to loans secured upon the evidence of shipping documents, and seems likely to facilitate in no small degree the financing of domestic trade between all parts of the country.

The Use of Bank Credit

From the foregoing it will be apparent that the use of bank credit is merely a means by which borrowers and lenders are brought together, the bank being the intermediary. Through the institution of commercial banking, trade is carried on by means of people becoming successively and alternately each other's creditors, so that money has only to pass from the first through the bank, or through two or more banks, and a clearing house to the last. All the intermediate transactions may then cancel, or cancellation may at times be complete, so that no balance remains. Cancellation of these serial and opposing debts has thus become the principal means