ACCEPTANCES 
 
 NEW YORK 
 
ACCEPTANCES 
 
 Their Importance as a Means of Increasing 
 
 and Simplifying Domestic and 
 
 Foreign Trade 
 
 With a Digest of the Amendments to the Federal 
 
 Reserve Act, Regulations of the Federal Reserve 
 
 Board, the United States Warehouse Act, the 
 
 Edge Export Finance Act, and the 
 
 Federal Bill of Lading Act. 
 
 FOURTH REVISED EDITION 
 August 15, 1921 
 
 Prepared and Issued by 
 The American Exchange National Bank 
 
 Broadway 
 
 at 
 Cedar St. 
 
 NEW YORK 
 
 COPYRIGHTED, 1921 
 THE AMERICAN EXCHANGE NATIONAL BANK 
 
V 
 
 ^^ 
 
 
 New York, August 15, 1921. 
 
 npHE monograph on Acceptances which was pre- 
 -■■ pared and first issued by this bank in April, 1916, 
 revised in December of that year, in June, 1918, and 
 again in April of the present year, attracted such wide 
 attention, and was so favorably received, that it is our 
 intention to continue to take an active part in keeping 
 this important subject before the business community. 
 
 With this object in view, we herewith present a 
 fourth revised edition of the Acceptances booklet, giv- 
 ing additional amendments to the Federal Reserve 
 Act and the latest regulations of the Federal Reserve 
 Board, affecting Acceptances, as well as an analysis 
 of the. Edge Export Finance Act and a digest of the 
 United States Warehouse Act and the Federal Bill 
 of Lading Act. 
 
 The American Exchange National Bank, 
 
 Lewis L. Clarke, President. 
 
FOREWORD 
 
 IN presenting the subject of Acceptances for the consideration of the 
 business interests of the United States, we do so with a feeling of 
 pride in the part that this bank has played in the commercial develop- 
 ment of the nation. 
 
 The American Exchange Bank was organized in 1838, antedating by 
 many years the National Banking System. In 1865, it was converted into 
 a National bank, and was one of the first banks to enter the Federal 
 Reserve System. 
 
 George S. Coe, who served as president of this bank from 1860 to 1894, 
 clearly foresaw the time when material changes in our banking system 
 would be needed. In 1881, Mr. Coe predicted the change from bond-secured 
 currency to currency secured by commercial assets, and then declared that, 
 after all, the latter was the most natural, useful and reliable basis. He 
 also said: 
 
 "The condition of a bank is soundest and its power most effective when 
 its assets are composed of notes, drafts and obligations of the people — the 
 title deeds to those commodities or articles most demanded for the sub- 
 sistence and necessities of men, and for their comfort and convenience — 
 together with a due proportion of ready money, into which all these things 
 are exchangeable. 
 
 "Commercial banks are the oldest and safest financial institutions in the 
 United States, or in the civilized world. They have, in all nations, outlived 
 the changes of the governments that formed them, and they have uniformly 
 given support to States in their greatest emergencies, rather than received 
 it, because commercial banks are the embodiment and the reservoirs of the 
 active industrial power of the people. Always, they are greater than the 
 State itself." 
 
 The American Exchange National Bank, having at all times taken an 
 active interest in the commercial development of the country, desires to do 
 its utmost to encourage the use of Bank and Trade Acceptances in the United 
 States, because it believes that their general employment will add materially 
 to the prosperity of the individual, as well as to the prosperity of the nation 
 itself. 
 
 THE AMERICAN EXCHANGE NATIONAL BANK. 
 
 — 3 — 
 
INDEX 
 
 I. Credit Functions and Instruments , 7 
 
 Acceptance an Important Credit Instrument 
 Trade Acceptance Defined 
 Acceptances Differ from Notes and Drafts 
 Fundamental Purpose of Acceptances 
 
 11. The English Credit System 11 
 
 "Dollar Exchange" and Sterling 
 
 England's Position in International Banking 
 
 The London Money Market 
 
 Theory of the English System 
 
 Classes of English Bills 
 
 British Banks Governed by , Traditions 
 
 Documentary Bills or Drafts 
 
 Safeguards of English Banks 
 
 Advances on Consignments' 
 
 Other Methods of Financing Shipments 
 
 III. German and French Systems Outlined 18 
 
 Operations of the Reichsbank 
 
 Bank Acceptances in Germany 
 
 Financing Germany's Overseas Trade 
 
 Bills of Exchange in France 
 
 Acceptances Replace Open Accounts Abroad 
 
 IV. The American Credit System 23 
 
 Cash Settlement of Bills 
 
 Some Drawbacks of Cash Discounts 
 
 Claims Arising in Settlement of Bills 
 
 Use of Single-Name Paper 
 
 Single-Name Paper Replaces Merchandise Notes 
 
 V. The Advantages of Acceptances 27 
 
 Question of Qerical Work "^ 
 
 Matter of Collection Charges 
 
 Credit Facilities Increased by Acceptances 
 
 Cash Discounts and Acceptances 
 
 Acceptances Not Detrimental to Credit System 
 
 Result of Unwarranted Expansion 
 
 Trade Acceptance Aid to Sound Banking 
 
 — 4 — 
 
INDEX— Continued 
 
 CHAPTER 
 
 pact; 
 32 
 
 VI. Developing the Market for Acceptances 
 
 Report of New York Federal Reserve Bank 
 Acceptances Benefit Both Buyer and Seller 
 General Use of Acceptances Urged 
 Broadening the Market for Acceptances 
 Growth of Acceptance Operations 
 
 VII. Amendments to the Federal Reserve Act 38 
 
 Banks May Now Accept in Domestic Transactions 
 Authorized Collateral for Reserve Bank Advances 
 Possibilities for Extension of "Dollar Exchange" 
 Establishment of Banking Connections 
 Additional Amendments to the Act 
 Reserve Banks' Discount Powers Broadened 
 Investments of National Banks 
 Amendments to Revised Statutes 
 Controlling Credit Through Discount Rates 
 
 VIII. Regulations of the Federal Reserve Board 50 
 
 Powers of New York State Banks 
 Desirability of Bills of Exchange 
 Scope of Acceptances Extended 
 Regulations on Bankers' Acceptances — . 
 Final Definition of Trade Acceptance 
 Open-Market Purchase of Bankers' Acceptances 
 Preferential Rate on Acceptances 
 Checking Tendency Toward Over-Expansion 
 Cable Transfers and Bills of Exchange 
 Character of Bills and Acceptances Eligible 
 Bills of Exchange and Trade Acceptances 
 Bankers' Acceptances- 
 Kinds of Bills and Acceptanc«s Specified 
 Maturity of Bankers' Acceptances Extended 
 Statutory Provisions Governing Rediscounts 
 Notes, Drafts, and Bills of Exchange Eligible 
 Applications for Rediscount 
 Promissory Notes 
 
 Drafts, Bills of Exchange, and Trade Acceptances 
 Six Months' Agricultural Paper 
 Rediscount of Bankers' Acceptances 
 Acceptance of Drafts and Bills of Exchange 
 Bills Drawn to Create "Dollar Exchange" 
 Operations of Foreign Banking Corporations 
 
 — 5 — 
 
INDEX— Continued 
 
 IX. The United States Warehouse Act 82 
 
 Receipts for Agricultural Products Stored 
 Contents of a Warehouse Receipt 
 Issue of Other than Original Receipts 
 Conditions Governing Delivery of Products 
 State Laws Not Impaired by Act 
 Regulations for Wool Warehouses 
 Negotiable and Non-Negotiable Receipts 
 Duplicating Receipts Lost or Destroyed 
 Regulations Covering Delivery of Wool 
 
 X. The Edge Export Finance Act 90 
 
 Authority for Formation of Corporations 
 How Corporations May be Organized 
 Form of Organization Certificate 
 Authority to Commence Business 
 Rules Governing Transfers of Stock 
 Stock Held Contrary to Law 
 Investments in Other Corporations 
 Issue of Debentures and Other Obligations 
 Sale of Foreign Securities 
 Regulations Governing Acceptances 
 Deposits and Reserve Required 
 General Limitations and Restrictions 
 Advantages of New Legislation 
 Support of Investors Essential 
 Powers of Corporations Varied 
 
 XL The Federal Bill of Lading Act 103 
 
 Two Kinds of Bills of Lading Defined 
 
 To Whom Carriers May Make Delivery of Goods 
 
 Deliveries for Which the Carrier is Liable 
 
 "Shipper's Weight, Load and Count" 
 
 Rights of Creditors to Attach Bills of Lading 
 
 Negotiating or Transferring Bills of Lading 
 
 Warrants, Indorsements, Rights and Remedies 
 
 Acceptance Forms 
 
 — 6— 
 
Chapter 1 
 
 CREDIT FUNCTIONS AND INSTRUMENTS 
 
 <<TN the primitive ages of commerce, article was exchanged for 
 A article without the use of money or credit. This was simple 
 barter. As civilization progressed, a symbol of property — a com- 
 mon measure of value — was introduced to facilitate the exchanges 
 of property. This may be iron or any other article fixed by law or 
 by consent, but it has generally been gold or silver. This certainly 
 is a gfreat advance beyond simple barter, but no greater than has 
 been gained in modern times by proceeding from the use of money 
 to the use of credit. 
 
 "Commercial credit is the creation of modern times, and be- 
 longs, in its highest perfection, only to the most enlightened and 
 best-governed nations. 
 
 "Credit is the vital air of the system of modern commerce. It 
 has done more — a thousand times more — to enrich nations than all 
 the mines of all the world. It has excited labor, stimulated manu- 
 factures, pushed commerce over every sea, and brought every 
 nation, every kingdom and every small tribe among the races of 
 men to be known to all the rest. It has raised armies, equipped 
 navies, and, triumphing over the gross power of mere numbers, it 
 has established national superiority on the foundation of intelli- 
 gence, wealth and well-directed industry. 
 
 "Credit is to money what money is to articles of merchandise. 
 As hard money represents property, so credit represents hard 
 money, and it is capable of supplying the place of money so com- 
 pletely that there are writers of distinction who insist that no 
 hard money is necessary for the interests of commerce. I am not of 
 that opinion. I do not think any government can maintain an 
 
 — 7 — 
 
exclusive paper system without running to excess, and thereby 
 causing depreciation. 
 
 "I hold the immediate convertibility of banknotes into specie 
 to be an indispensable security for their retaining their value. But 
 consistently with this security, and indeed founded upon it, credit 
 becomes the great agent of exchange. It increases consumption 
 by anticipating products, and supplies present wants out of future 
 means. As it circulates commodities without the actual use of 
 gold and silver, it not only saves much by doing away with the 
 constant transportation of the precious metals from place to place, 
 but also accomplishes exchanges with a degree of dispatch and 
 punctuality not otherwise to be attained. 
 
 "All bills of exchange, all notes running upon time, as well as 
 the paper circulation of the banks, belong to the system of com- 
 mercial credit. They are parts of one great whole. We should 
 protect this system with increasing watchfulness, taking care, on 
 the one hand, to give it full and fair play, and, on the other, to 
 guard it against dangerous excess." 
 
 This masterly summing up of the functions of credit and its 
 instruments might have been uttered but yesterday, instead of 
 more than four-score years ago. It is from a speech by Daniel 
 Webster in the United States Senate, March 18, 1834. 
 
 Acceptance an Important Credit Instrument 
 
 Credit is the lifeblood of business. One of the principal chan- 
 nels through which it flows is the acceptance, or time bill of 
 exchange. 
 
 The system of credit based on acceptances has been very wide- 
 ly developed through long usage in England, France and Germany. 
 It is so comparatively new in the United States that it is not yet 
 generally understood. Its fields of employment here, however, are 
 broadening rapidly, and it seems likely to become, before very long, 
 one of our chief credit instruments. Such an opinion was expressed 
 by the Federal Reserve Board in its circular of February 8, 1915, 
 as follows: 
 
 "The Acceptance is still in its infancy in the field of American 
 banking. How rapid its development will be cannot be foretold, 
 but the development itself is certain." 
 
 — 8 — 
 
Trade Acceptance Defined 
 
 The term "Trade Acceptance" is defined by the Federal Re- 
 serve Board in its circular of July 15, 1915, as 
 
 "a bill of exchange _...drawn to order, having a definite ma- 
 turity and payable in dollars in the United States, the obliga- 
 tion to pay which has been accepted by an acknowledgment, 
 written or stamped, and signed, across the face of the instru- 
 ment, by the company, firm, corporation or person upon whom 
 it is drawn; such agreement to be to the effect that the ac- 
 ceptor will pay at maturity, according to its tenor, such draft 
 or bill without qualifying conditions." 
 
 A bill of exchange is defined by the English Bills of Exchange, 
 Act of 1882, as "an unconditional order in writing, addressed by 
 one person to another, signed by the person giving it, requiring 
 the person to whom it is addressed to pay on demand, or at a fixed 
 or determinable future time, a certain sum in money to, or to order 
 of, a specified person, or to bearer." 
 
 A negotiable bill of exchange, or acceptance, therefore, is a 
 written order whereby A commands B to pay to C, or to his order, 
 or to bearer, a sum of money absolutely and at a certain future 
 time. A is the drawer, B the drawee, and C the Payee. If B 
 agrees to obey the order upon him, he writes the word "Accepted" 
 across the face of the bill and signs his name below this word, 
 together with the date of the acceptance, the date that it is pay- 
 able, and the place. Thereupon B becomes and is known there- 
 after as the Acceptor, and the document is known as an Accepted 
 Bill, or Acceptance. Such instruments are two-name paper, since 
 they carry the names of both the Drawer and the Acceptor, If 
 the Payee chooses to transfer the paper and all his rights under 
 it to some other person, he indorses it. 
 
 Acceptances Differ from Notes and Drafts 
 
 An acceptance, or time bill of exchange, therefore, is an order. 
 Its acceptance is equivalent to the promise to pay that is contained 
 in a promissory note. The promissory note, however, is not in- 
 tended to transfer funds, but to settle debts and borrow money, 
 
 — 9 — 
 
A note is drawn by persons. An acceptance is drawn on persons. 
 The acceptance consequently performs an entirely different func- 
 tion than the promissory note. Each has its distinct field in the 
 world's financial affairs. 
 
 The acceptance differs also from the commercial draft. The 
 commercial draft, with bill of lading attached, may be drawn at 
 sight, or may be made payable at a certain time after sight. This 
 enables the title to the goods covered by the bill of lading to re- 
 main vested in the seller, the drawer of the draft, or the person to 
 whom the bill of lading may be indorsed, until the draft is paid. 
 Another form of commercial draft is the sight draft for collection, 
 which is drawn on buyers who have been previously sold on open 
 account. It has been generally used as a means of collection when 
 ordinary means have failed to produce payment. The trade ac- 
 ceptance, on the other hand, is an acknowledgment of an obligation 
 and a promise to pay it on a certain date. 
 
 Fundamental Purpose of Acceptances 
 
 The time bill of exchange, or acceptance, has a fundamental 
 purpose which neither the promissory note nor the commercial 
 draft possesses. That purpose is to facilitate the mutual offsetting 
 of debts between individuals, as well as nations. Acceptances, or 
 time bills of exchange, pass from hand to hand the same as money. 
 They serve the same purpose as the transfer of gold itself in the 
 cancellation of debts. Abroad, they have long been considered as 
 the easiest and cheapest form of credit instruments. 
 
 EKTonomists regard acceptances as a sort of special currency. 
 Such really has been their use for the last two centuries in the Old 
 World, where acceptances have been employed between business 
 houses in the settlement of accounts. They circulate among banks 
 which buy and resell them according to their needs until they are 
 negotiated to the central or government bank of the country. The 
 provisions of the Federal Reserve Act, their interpretations by the 
 Federal Reserve Board, the regulations issued by it, and the differ- 
 ent State laws enacted in recent years indicate a purpose to make 
 bank acceptances an asset quickly and easily convertible into cash, 
 and to constitute an additional reserve to the banks carrying them. 
 
 — 10 — 
 
Chapter II 
 
 THE ENGLISH CREDIT SYSTEM 
 
 IN England and Germany, the bank acceptance is the principal 
 form of credit. In France, the individual acceptance is more 
 generally used. 
 
 London became the center of international payments in export 
 trade through England's being the chief commercial carrier in the 
 early stages of the development of Europe's export markets. Eu- 
 ropean traders were quick to see the convenience and advantage 
 of receiving their payments in one currency, rather than in the 
 miscellaneous currencies of the different overseas markets. Thus, 
 London not only became a clearing house for international set- 
 tlements, but also a central place of deposit for bankers and 
 merchants all over the world. 
 
 This created an immense revenue for England. For very 
 many years, London collected a heavy toll from the financing 
 of practically all the exports and imports between the United 
 States and other countries. The proceeds of a shipment of ma- 
 chinery or merchandise, for example, from St. Louis, Chicago or 
 New York, destined to some point in South America, would be 
 in the form of a draft drawn on London. For the acceptance of this 
 draft, the London banker would charge a round commission. A bale 
 of raw silk imported from Japan by a house in New York would be 
 paid for by the seller in Japan drawing a bill on London. It was 
 estimated, before the Federal Reserve Act went into operation, 
 that American exporters and importers were paying London some 
 $10,000,000 a year for such services. 
 
 — 11 — 
 
"Dollar Exchange*' and Sterling 
 
 The fundamental reason for this was that the bank accept- 
 ances in pounds sterling could always be converted into the local 
 currency of any country at a close rate of exchange, whereas a 
 draft in dollars on New York would have no such markets. To-day, 
 this condition is changing rapidly, and "dollar exchange," in many 
 of the world's marts, is being sought instead of sterling because its 
 purchasing power as expressed in local currency is greater than 
 that of sterling exchange. This gives the American exporter an 
 advantage that he has never before enjoyed — that of dealing with 
 foreign buyers and sellers in his own domestic currency, thereby 
 saving the extra cost of exchange on London, and other expenses. 
 
 England's Position in International Banking 
 
 While other nations have become important factors in the 
 ocean-carrying trade, and thus are less dependent upon the great 
 and long-established facilities of Great Britain for the transporta- 
 tion of merchandise across the seas, they have been less successful 
 in their attempts to deal directly with their international customers 
 and to eliminate London as a center of financial intercourse with 
 the export markets of the world. Germany, for example, by the 
 organization of German merchants in many foreign markets, suc- 
 ceeded in establishing a standing for German currency abroad and 
 a certain volume of direct financial intercourse. Yet the German 
 exporters and importers still relied largely on London in their 
 overseas settlements, as England has developed the standard forms 
 of dealing with the financing of shipments to and from overseas 
 markets. 
 
 The English banks engaged in international banking have 
 divided their world territory on the basis of commercial usages and 
 prevailing business conditions. East and West are sharply dif- 
 ferentiated, and the British dominions with a white commercial 
 population are catered to by special banks. Within these three 
 great divisions, there is a further specialization by countries. Al- 
 most all of these banks have headquarters in London. 
 
 — 12 — 
 
The London Money Market 
 
 The heart of the London money market is the Bank of Eng- 
 land. Then there are the great joint stock banks, with several thou- 
 sand branches; the Colonial banks; the Foreign banks, which, to- 
 gether with the Colonial banks, practically cover the world with 
 their branches; finance houses that make a specialty of accepting 
 bills growing out of imports and exports; stock brokers; bill 
 brokers ; the Stock Exchange and its affiliations ; the insurance com- 
 panies, and the private lenders, who, in the aggregate, compose 
 the great money-holding interests of London and what is ordinarily 
 known as the London money market. 
 
 The Bank of England does not buy bills payable abroad. It 
 requires two British names to the bills it purchases, and one of 
 these must be the acceptor. 
 
 Theory of the English System 
 
 The London money market is regulated principally by the 
 open-market operations of the bankers and brokers. If they con- 
 sider that the commercial public is over-trading, they check this 
 tendency by ceasing to buy bills. The Bank of England, while it 
 is not obliged to buy all bills that are offered, is accustomed to 
 purchase all that comply with its requirements. The whole theory 
 of the English system is based on the keeping of balances with the 
 Bank of England which are immediately convertible into cash, and 
 the rediscounting of paper with the bank to obtain cash. 
 
 The Bank of England rate of discount, which is fixed at the 
 weekly meeting of the Board of Directors and is published on 
 Thursdays, moves up or down primarily in accordance with the 
 law of supply and demand. If the demands are heavy and the 
 supplies of funds are low, the Bank increases its rate, which 
 discourages borrowing. If the opposite condition prevails, the rate 
 is lowered and borrowing is correspondingly stimulated. 
 
 — 13 — 
 
Classes of English Bills 
 
 The two classes of bills or acceptances most largely dealt in 
 by the London market are the "trade bill" and the "finance bill." 
 The former is the result of one merchant selling goods to another. 
 The seller draws on the buyer; the latter accepts the paper and 
 returns the bill to the seller, who discounts it with his banker, or 
 in the open market. The "finance bill" may represent exchange 
 transactions ; it may be for the purpose of carrying stocks of goods 
 or securities, or in the anticipation of public loans; or it may be 
 merely for accommodation. All finance bills, except the last named, 
 when properly accepted, are eligible for rediscount by the Bank 
 of England. 
 
 An essential part of these bills of exchange consists of bills 
 drawn on bankers and accepted by them on behalf of customers in 
 accordance with arrangements previously made. These "bank 
 bills," while usually drawn to liquidate a commercial transaction, 
 being accepted by a bank, become of a higher quality than mercan- 
 tile acceptances, unless the latter are of the highest standing. 
 These "bank" or "prime" bills are discountable at the lowest mar- 
 ket rates. As the quality of the acceptance becomes lower, the 
 rates for its discount rise in proportion to the possible risk. Gen- 
 erally, in the London market, the rate for trade bills is one-half of 
 one per cent, higher than for bank bills. In the English money 
 markets, close watch is kept on the amount of paper that is dis- 
 counted by each of many thousands of firms. A house that ap- 
 pears to be over-extending its credit is immediately made aware of 
 the prevaiHng opinion by finding that its bills are selling below 
 the market, or by the rates being raised for additional acceptances 
 that it seeks to discount. 
 
 British Banks Governed by Traditions 
 
 It is this uniformity of security that has made possible the 
 great public discount markets in London and the other leading 
 financial centers of Europe. The English banks are legally re- 
 stricted only in regard to bank notes — not as to their banking 
 operations. They may open as many branches as they like; they 
 may make any kind of advances they choose; the form of their 
 
 — 14 — 
 
investments or reserves is not governed by any Act of Parliament. 
 In fact, the English bank uses its reserves whenever it considers 
 it necessary. But although these British financial institutions seem 
 to be a law unto themselves, they are actually governed by tradi- 
 tions, tmwritten laws and public opinion. These forces keep 
 them to a high standard of excellence and banking conduct. 
 
 Documentary Bills or Drafts 
 
 The bulk of payments through London foreign banks — those 
 engaged particularly in international trade — is on the basis of docu- 
 mentary bills or drafts. These are drafts accompanied by bills of 
 lading (full sets), invoice copy and insurance certificates. There 
 are also so-called "clean bills," unaccompanied by such documents. 
 The documentary drafts are drawn either against payment (d/p) 
 or against acceptance (d/a). In the case of documents against 
 payment, it frequently happens that the drawee pays before the 
 draft falls due, if, for instance, he has resold the goods and needs 
 the documents. In this case, he receives an interest allowance, 
 generally one per cent, below the central bank discount rate. 
 Only partial advances are made in England to drawers on d/a 
 drafts, and even these are not readily granted. These acceptances 
 are more readily taken as collateral in loans or current accounts 
 (over-drafts), or fully discounted. 
 
 These documentary drafts are usually drawn at from two to 
 six months. The interest clause becomes more and more import- 
 ant as the distance and time of transit of documents between the 
 shipping or receiving point of the goods and London increases. 
 In London's dealings with the Far East, for example, the drawee 
 has to pay, in addition to the face value of the draft, a certain 
 interest until the approximate day of the receipt of the return 
 funds in Europe. Such drafts contain this clause: "With interest 
 at — per cent, per annum added thereto from the date hereof to 
 approximate due date of arrival of the funds in London." 
 
 The major portion of the business of the English banks in 
 overseas settlements is to take up documentary drafts, either for 
 collection or for payment and advances thereon, or for acceptance 
 on a commission basis. Occasionally, the buyer on the other side 
 
 — 15- 
 
of the world has a credit with the bank in London, from which he 
 authorizes the latter to pay invoices. This is the very best of 
 all methods of financing shipments. 
 
 Safeguards of English Banks 
 
 The mere collection of drafts is only a very small part of the 
 activities of British banks. Most London banks decline specifi- 
 cally to assume any liability for losses in connection with drafts; 
 for documents that they handle; for merchandise that they may 
 be called upon to take over; for the solvency or the remittances 
 of their agents or correspondents, etc. While they safeguard 
 themselves in every way consistent with sound and conservative 
 banking principles, they undertake to use all care and diligence in 
 the interest of their clients. As a rule, the English usage is that 
 the customer shall assume the costs of collecting the drafts and 
 of forwarding the proceeds to the seller. For this reason, the 
 drafts either include these expenses in their face value or bear 
 the clause "charges for collection to be added," or, on South Africa 
 and Australia, "remitting exchange to be collected." 
 
 Advances on Consignments 
 
 In addition to partial or total advances on drafts, and even to 
 their outright purchase, English banks make advances on con- 
 signments. In such cases, the signature of the drawer of the draft 
 forms one part of the security, and the goods the other. If the 
 goods are to be turned over on acceptance of the draft, the bank 
 retains a lien on the goods, which remain practically mortgaged to 
 the bank until the draft is paid. The bank's rights are acknowl- 
 edged in a "letter of hypothecation," which reads, in part, as 
 follows : 
 
 "The above shipment, the goods and the proceeds thereof are 
 to be treated as specially hypothecated to you by way of collateral 
 security." Or, "the said goods in the meantime, and their pro- 
 ceeds or any part thereof, to be held by in trust, on 
 
 your behalf, for the payment of the said sum." The bank can 
 
 — 16 — 
 
instruct the consignee regarding fire insurance, sale, etc. The 
 recipient of the advance also specially binds himself to guard the 
 bank against any loss in connection with the failure to sell, etc. 
 The consignee signs a "letter of lien" or a "letter of trust," which 
 says: "We hereby engage to receive and hold the said goods in 
 trust in your behalf, to have them duly stored, insured against 
 fire, and to remit to you the proceeds as and when sold." 
 
 Other Methods of Financing Shipments 
 
 Still another method of financing foreign shipments, and one 
 that is more generally used by the London banks, is to permit the 
 shipper to draw on them, promising to accept the draft. In this 
 case, the bank must be secured before the maturing date of the 
 acceptance. This method is very advantageous to the exporter, be- 
 cause an acceptance by a first-class English bank can always be 
 turned into cash at the lowest market rate at once, and for its full 
 amount. The bank is not out any money, and provides for being 
 fully secured before the date when the acceptance has to be taken 
 up. Here the accepting bank acts as an agent for the buyer and 
 takes control of the goods, turning them over against a letter of 
 trust or promissory note, or it stores them at destination and 
 delivers them against the buyer's warrants. 
 
 Another phase of this transaction, where the bank authorizes 
 the seller to draw and promises to accept the draft, is the con- 
 firmed letter of credit, by which the bank binds itself to accept 
 drafts to a certain stipulated amount. 
 
 17 — 
 
Chapter III 
 
 GERMAN AND FRENCH SYSTEMS OUTLINED 
 
 THE English system has been outlined in considerable detail 
 because the methods of other countries, especially Germany, 
 have been largely adapted from it. There are not in the English 
 system, however, the extensive ramifications of long-term industrial 
 credits that are found in the German system, which is partly due 
 to the peculiarly intimate connection between banks and industrial 
 enterprises that is characteristic of Germany. While the British 
 overseas banks and export merchants furnish adequate accommo- 
 dations to foreign customers, they have shown a consistent tend- 
 ency to keep down the length of credit terms, preferring — other 
 things being equal — to let the trade go rather than encourage a 
 policy which, from their long experience, they believe to be harmful. 
 The long-term credits that the Germans were accustomed to 
 extend in Latin-America, in the Far East and in other export mar- 
 kets, it is important to note, were not credits given by manufac- 
 turers, but by the export merchants with or without the financial 
 assistance of certain banks. The German export merchant, as a 
 rule, purchases from the manufacturer on the basis of making 
 payment within 30 days, the usual stipulation being that he shall 
 have the goods in his possession before settling. There has been 
 a growing tendency of late years, however, to eliminate the export 
 merchant as an economic factor in Germany, and for the manu- 
 facturer to do business direct in overseas markets on a cash or a 
 short-term credit basis. By eliminating interest charges and mid- 
 dlemen's profits, this makes for lower prices. 
 
 — 18 — 
 
Operations of the Reichsbank 
 
 The great Reichsbank, a private institution, with private 
 means, yet under the control of the State, dominates the German 
 banking system and the German money market. The Reichsbank 
 dictates the discount rate and the rate for loans. The great banks 
 of Germany are in constant intercourse v^^ith it, and are the Reichs- 
 bank's so-called "giro" customers. "Giro" is a Spanish word, 
 meaning the circulation of specie or bills of exchange, and as used 
 in Germany signifies that, in place of making cash payments to one 
 another, these banks can use the Reichsbank as a clearing house. 
 
 The principal business of the Reichsbank is the discount of 
 short-term bills of exchange, and particularly mercantile bills. 
 Credit and finance bills, as a rule, are excluded from its transac- 
 tions. The soundness of this practice is obvious. A bill is based 
 upon a real money claim and is, to a certain extent, a security in 
 itself. It is secured by the business capital already employed, and 
 when discounted it discharges the economic function of liquidating 
 that portion of the producer's capital contained in the goods. It 
 releases the fixed capital in the goods and makes it available for 
 another operation. The Reichsbank and the other banks of Ger- 
 many encourage the use of bills in both internal and foreign trans- 
 actions, and are themselves large acceptors of bills. Thus, they 
 have become important factors in the development of the great 
 banking system of the country. 
 
 Bank Acceptances in Germany 
 
 In Germany, the direct "trade acceptance" has been displaced 
 by the bank acceptance. This is due to the custom of merchants 
 drawing on their bankers instead of on the purchasers of their 
 goods, and using the banker's acceptance in paying their creditors. 
 Most of the German bills are accepted on the basis of their indi- 
 vidual credit standing, and not against collateral, as is the case 
 in England. The development of this practice is explained, to a 
 certain extent, by the large participation of the great banks in a 
 vast number of industrial enterprises. German banks are repre- 
 sented on the boards of directors in numerous undertakings of the 
 
 — 19 — 
 
most varied character throughout Germany, and give them special 
 support in their credit transactions. 
 
 In selling a bill of goods, the merchant or manufacturer will 
 arrange with his bankers to draw on the latter for the amount, 
 thus anticipating payment for the goods. When so accepted, the 
 bill is sold to other bankers, or in the open market. When thus 
 indorsed, it becomes "prime" paper and eligible for rediscount at 
 the Reichsbank. 
 
 All classes of domestic exchanges in Germany are, to a large 
 extent, adjusted by means of these bank acceptances, which consti- 
 tute about 80 per cent, of the bills held by banks. The credit stand- 
 ing of the drawee makes the acceptance readily discountable in the 
 private market. The judgment of the market prevents excesses 
 through inflating the acceptance credit. When there is too much 
 of it outstanding, the market reacts. The grantor of the credit, 
 therefore, naturally is careful not to do anything to shake the 
 confidence of the market in himself. 
 
 Financing Germany's Overseas Trade 
 
 Imports are financed by the banks of Germany in practically 
 the same way as in England, and with similar safeguards. In 
 financing exports, the German merchant, selling on six months* 
 time and wanting immediate cash, does not draw on the overseas 
 buyer, for that is not in the terms of sale and the draft would not 
 be accepted. The seller arranges with his banker to accept a draft 
 drawn on the strength of the sale. This "banker's acceptance," 
 which is usually drawn for three months, but which may be re- 
 newed, is generally at the rate of ^ of 1 per cent, for the three 
 months, to which must be added revenue stamps and brokerage. 
 The exact amount of the acceptance commission is regulated by 
 the desirability of the acceptance as determined by the open dis- 
 count market. 
 
 Bills of Exchange in France 
 
 The widespread use of bills of exchange in France is due, in a 
 large measure, to the liberal policy pursued by the Bank of France 
 in relation to the discount of such paper. Together with gold and 
 
 — 20 — 
 
silver, commercial paper forms the basis of the note issue. Com- 
 mercial paper of a certain quality is interchangeable with bank 
 notes. 
 
 The Bank of France is a privately owned corporation and, 
 with its nearly 600 branches, covers all France. It opens accounts 
 with anyone known to it, and discounts for anyone who has ob- 
 tained that right. In the Paris offices, a little more than half the 
 paper discounted is for less than 100 francs (normally about $20), 
 and the average count is five francs. Bills, commercial and agricul- 
 tural warrants of fixed maturity, which have not more than three 
 months to run and bearing three signatures, two of which are of 
 parties domiciled in France and known to be solvent, are freely 
 accepted. Two-name bills are accepted only when accompanied by 
 satisfactory collateral. Warehouse receipts are also received. 
 
 The private banks lend largely on two-name paper, and by 
 adding their own indorsement make it a three-name paper eligible 
 for rediscount at the central bank. These private banks also 
 discount each other's acceptances. The usual rate for accepting 
 is J4 of 1 pci" cent, for three months; sometimes it is as low as 3/16. 
 
 Acceptances Replace Open Accounts Abroad 
 
 From the foregoing necessarily brief outline of the acceptance 
 and draft systems in vogue in the three principal trading and 
 banking countries of Europe, it will be seen that in these countries 
 the open account is replaced by the bill of exchange, or time draft. 
 The acceptance, or time bill of exchange, is immediately convert- 
 ible into cash and, together with the check, forms the perfect med- 
 ium of large payments, just as the bank note forms the perfect 
 medium of small transactions. Quick redemption, expansion and 
 contraction with the fluctuating needs of business make the check 
 and the bill of exchange ideal credit instruments, for they are both 
 economical and efficient. 
 
 An acceptance, or time bill of exchange, is superior to a 
 promissory note in having behind it the responsibility of the 
 maker, the responsibility of the acceptor and a specific shipment 
 of goods, which presumably are to be resold during the life of 
 the instrument and thereby provide means of payment. Abroad, 
 
 — 21 — 
 
these drafts and acceptances circulate from hand to hand exactly 
 as checks do in this country. There is an obvious necessity for 
 meeting them when they fall due, because otherwise the acceptor 
 would soon lose his credit standing and have to go out of business. 
 Furthermore, they provide a complete separation between com- 
 mercial credits and investment credits, which have been so con- 
 fused under the American method that the distinction is often 
 lost sight of. 
 
 -22 
 
Chapter IV 
 THE AMERICAN CREDIT SYSTEM 
 
 THE history of bills of exchange in the United States runs back 
 to Colonial times. They were then used for many purposes, 
 but were mostly devices of the State to be employed in lieu of 
 metallic money. They were not true ^'trade bills," for a com- 
 paratively small proportion of them arose from commercial trans- 
 actions. 
 
 After the birth of the United States, and up to the Civil War 
 period, there was a steady increase in the proportion of this coun- 
 try's business done through the medium of bills drawn by the seller 
 of the goods on the buyer. These "acceptances," as they were 
 called, stood high and played a prominent part in the commercial 
 affairs of the country. Generally speaking, in proportion to the 
 volume of business done, acceptances were then as largely em- 
 ployed as they were in England during that period. 
 
 The Civil War, however, brought an aftermath of the whole- 
 sale demoralization of credit throughout the United States. Out 
 of this grew the peculiarly American system of cash discounts. 
 
 Cash Settlement of Bills 
 
 For a number of years after the close of the Civil War, credits 
 were uncertain, interest rates were high and the cash settlement 
 of bills was, therefore, unusually desirable. The cash discount be- 
 came the customary inducement for the settlement of bills, and 
 varied, as it does now, but within wider limits, according to 
 whether payment was spot cash or in ten or thirty days' time. 
 Because of the high interest rates, these cash discounts had to be 
 sufficiently large to spur the buyer to borrow funds and use them 
 
 — 23 — 
 
for the prompt settlement of his commercial debts. This method 
 relieved the seller of all responsibility for carrying the account, 
 and consequently was of distinct advantage to him. On the other 
 hand, if a buyer was not able to avail himself of the cash discount, 
 it became a fair assumption that he was not in sufficiently good 
 standing with his bank to be in a position to borrow the money 
 that he needed for that purpose, and this fact cast a certain dis- 
 credit upon him. Subsequently, as interest rates became less, 
 cash discounts became smaller, until, as at present in many lines 
 of trade, the rate of these cash discounts and the bank discount 
 rate approach a parity. 
 
 Some Drawbacks of Cash Discounts 
 
 Out of this system of cash discounts, however, another evil 
 grew, and one that still prevails. Debtors frequently exceed the 
 discount period as stated on the invoice, and when paying their 
 bills deduct the discount anyway. Sellers, owing to close com- 
 petition, are often inclined to permit this practice, thus allowing 
 the buyers to gain an unfair advantage, not only over their com- 
 petitors, but also over the sellers themselves. The seller, there- 
 fore, is compelled — or at least is tempted — to figure his prices high 
 enough to stand this improper deduction. This, of course, works 
 to the disadvantage of the buyer who scrupulously observes the 
 invoice terms of 30 days net, 2 off 10; or 90 days net, 4 off 30 and 
 6 ofif 10, or whatever they may be. 
 
 Still another drawback of the cash discount system, as a whole, 
 is that being temporarily unable to discount his bills is an onerous 
 tax on the purchaser of limited means who is thoroughly reliable. 
 In his case, as in the case of others, it is often difficult and incon- 
 venient to make a separate loan to cover each bill or group of 
 bills when they come in. One way of looking at the cash dis- 
 count is in the light of a fine for letting an account go to maturity. 
 The debtor who does not pay his account when it is due, but lets 
 it go as long as he can without being sued, actually pays no more 
 for his 60 or 90 or 120 days' credit than the one who settles the 
 account on its due date, 10, 15 or 30 days after the date of invoice. 
 
 The open account system, on which the cash discount practice 
 rests, is relatively little used in Europe. It is there regarded as a 
 
 — 24- 
 
method by which the slow-paying buyer can use the seller as his 
 involuntary banker without paying for the accommodation and 
 risk. 
 
 Claims Arising in Settlement of Bills 
 
 Still another objection to the open account system is that 
 claims are made at the time of settlement of bills— a constant 
 source of annoyance. A merchant's invoice sold on open account 
 generally states the terms of sale, or the date when that invoice is 
 due and payable. Notwithstanding this, open accounts are prac- 
 tically payable at the will of the debtor. If they are not paid 
 on request, the seller must sue, and must legally swear to the just- 
 ness of his account and dispute any contention to the contrary. 
 He must be able to prove his account, but before he can do so he 
 runs the risk of counterclaims, setoffs and other troubles that must 
 be contested successfully. 
 
 There is nothing to indicate the obligations between the buyer 
 and seller except open accounts on the books of each. If the 
 seller, in anticipation of the settlement of some of his book accounts, 
 wishes accommodation at his bank, he must borrow upon his note. 
 If he uses his credit instead of collateral, he furnishes the bank 
 with a statement of his assets and liabilities. That is all the pro- 
 tection a bank has in such a case. It is but natural, however, that 
 a bank having the accounts of various business houses should feel 
 obliged to extend them certain lines of credit in accordance with 
 their responsibility and borrowing requirements. 
 
 Use of Single-Name Paper 
 
 In recent years, it has become customary for merchants pre- 
 senting good statements of their condition to sell their promissory 
 notes to the public through brokers in commercial paper. These 
 notes are offered to the banks and are largely purchased, ulti- 
 mately, by investors who wish to find employment for their sur- 
 plus funds. A considerable proportion of these notes is single- 
 name paper, which is sold solely upon the credit standing of the 
 maker. The only responsibility assumed by the broker is for the 
 genuineness of the signature. When money is easy, there is a 
 
 — 25 — 
 
wide market for this class of commercial paper, but its buyers 
 must depend entirely on such credit information as they can obtain 
 regarding its intrinsic value. These instruments of credit — plain 
 notes of hand — are therefore bought and sold on faith alone. Gen- 
 erally, their makers furnish financial statements only once a year 
 and, naturally, at the period when their business is in the most 
 favorable financial condition. It is, of course, very difficult to 
 ascertain exactly the volume of paper a certain maker may have 
 outstanding at a given time, and there is no indication as to the 
 occasion of its origin. 
 
 Single-Name Paper Replaces Merchandise Notes 
 
 The use of single-name paper dates from the Civil War period. 
 Prior to that time, merchandise notes were largely used, running 
 for six months, and even longer. The financial derangements that 
 followed the Civil War, however, increased the uncertainty of 
 value of these long-term credit instruments. The period of credit 
 was shortened and concessions were made for quick settlements. 
 
 At this writing, single-name paper predominates in the Ameri- 
 can market. There are several firms that are said to handle more 
 than a hundred millions annually. 
 
 While the market for single-name paper has been great in 
 volume, it has been restricted in no small degree, so that a consid- 
 erable proportion of it is comprised of notes made by firms of 
 large capital and easily ascertainable credit standing. Some 
 brokers, in fact, will not handle paper of concerns having less 
 than $500,000 assets. This form of borrowing, however, has 
 spread to smaller and weaker concerns. 
 
 — 26 — 
 
Chapter V 
 
 THE ADVANTAGES OF ACCEPTANCES 
 
 THE relative advantages and disadvantages of the acceptance 
 form and the practice of borrowing in the open market on 
 single-name paper have been the subject of much controversy. It is 
 pointed out, for instance, that it is much simpler for a merchant 
 to sell ten notes of $5,000 each and pay two or three hundred bills 
 with the proceeds — availing himself of the cash discount — than it 
 would be for him to put several hundred trade acceptances into 
 circulation. Obviously, the cost of bookkeeping and collection 
 would be less in the case of the few notes than for the many 
 acceptances. Of course, the seller of the notes has to draw as 
 many checks as he has bills to pay, but the checks are quickly 
 redeemed and pass out of existence. The checks do not involve 
 as much bookkeeping as a similar number of acceptances. 
 
 Question of Clerical Work 
 
 This question of clerical work concerns the banks also. The 
 average man does not realize the amount of detail involved in 
 the handling of discounts by a bank. There is a manufacturer, 
 for instance, who takes notes in payment of his output and dis- 
 counts them at several banks. Owing to the large volume of 
 paper that the banks have to handle, he is paying ^ of 1 per cent, 
 of the face value of the notes to cover clerical hire. This just 
 about covers the cost to the banks. 
 
 If a business house of large size should make a practice of 
 taking an acceptance for every invoice, or should turn all its open 
 accounts into acceptances once or twice a month, it would natu- 
 rally follow that it would give to its bank a thousand different 
 pieces of paper, instead of one or two. Under the circumstances, 
 the bank would obviously be justified in making an equitable 
 charge for the extra amount it would have to spend for clerical 
 
 — 27 — 
 
labor in order to handle the flood of acceptances. On the other 
 hand, the merchant would gain an advantage by using the accept- 
 ance instead of the open account system with his customers, and 
 this advantage would more than offset the trifling additional ex- 
 pense of the bookkeeping in the bank and in his own office. 
 
 In Europe, acceptances are used much more freely than checks, 
 and this detail of bookkeeping expense has adjusted itself. In this 
 country, where the check is employed more freely than anywhere 
 else in the world, no doubt the growth of the acceptance system 
 will eventually decrease the volume of checks, and thus, through 
 the working out of the old laws of compensation, the clerical ques- 
 tion will reach an equilibrium. 
 
 Matter of Collection Charges 
 
 An additional expense in connection with the acceptance busi- 
 ness, but one which also applies in the use of checks, is that in- 
 volved by collection charges on out-of-town items. 
 
 Under clearing house regulations, charges are made on various 
 points for collecting both bankers' and trade acceptances, as well 
 as checks or drafts. These charges range, in the case of the New 
 York Clearing House, from 1/40 to 1/10 of 1 per cent, on bankers* 
 acceptances, while a flat charge of 1/10 of 1 per cent, is made on 
 trade acceptances, notes, etc. The collection charges on bankers' 
 acceptances are, therefore, less than those on trade acceptances, 
 and they also average lower than those on checks or drafts. 
 
 In many instances, it is important to note, no charge at all is 
 made, particularly on bankers' acceptances. With the broader de- 
 velopment and application of the facilities of the Federal Reserve 
 System, moreover, the number of par points is steadily increasing, 
 and it seems probable that the entire country will, in time, be placed 
 upon a par basis. 
 
 Credit Facilities Increased by Acceptances 
 
 One of the objections to domestic accceptances is based on the 
 ground that their negotiation by the banks in the open market of 
 discount would deprive commercial houses of selling, as heretofore, 
 their own single-name notes. It has been a common banking 
 experience, however, that the open market of discount for bank 
 
 — 28 — 
 
acceptances is entirely separate from, and does not interfere with, 
 the discount of single-name commercial paper, which will con- 
 tinue to be handled on the same basis as before bank acceptances 
 came into existence. Banks having surplus funds to invest will 
 always be attracted by the commercial paper of a responsible 
 house. Instead of curtailing their facilities, bank acceptances may, 
 on the contrary, enlarge the financial accommodations put at the 
 disposal of reliable firms and corporations. For example, a bank 
 or discount house may purchase the single-name notes of a cer- 
 tain concern up to $50,000; this transaction will not prevent the 
 same bank from purchasing even a larger amount of bills drawn 
 by the same firm and accepted by responsible banks, the liability 
 and credit of which will mostly be taken into consideration in this 
 second transaction. 
 
 The tendency of trade acceptances, therefore, is toward in- 
 creasing a merchant's banking facilities. As it is now, the 
 merchant makes an arrangement with his bank for a certain line 
 of credit. As a rule, the basis of this is his statement, which in- 
 cludes accounts receivable of whose nature the banker knows 
 nothing, unless the merchant has gone so far — which is unusual — 
 as to have his business thoroughly examined and audited by a 
 certified public accountant who reports not only on the arithmetic 
 of the business, but also as to the character and soundness of all 
 its resources. On the other hand, acceptances indicate the class 
 of trade a merchant is dealing with. In other words, it enables 
 the bank to check up the acceptor. The banker is primarily a 
 dealer in credit, and it is to him the public looks to keep the 
 credit machine in good order. The acceptance system helps the 
 banker to keep sound the credit structure over which he presides. 
 
 Cash Discounts and Acceptances 
 
 Trade acceptances need not interfere with cash discounts. If 
 an invoice were paid in ten days, with a deduction of the cash dis- 
 count, the acceptance could be returned unsigned, accompanied by 
 the check in settlement of the bill that the acceptance covered. 
 Or, if it should be found desirable to anticipate maturities after 
 acceptances had been signed, the bank, if it desired to aid in 
 creating acceptances, would be willing to rebate the interest for 
 
 — 29^ 
 
the unexpired time. This is a common practice with foreign ac- 
 ceptances where documents are attached and only deliverable on 
 payment of the draft. Such drafts are drawn at 60 or 90 days' 
 sight, with the understanding that if the acceptor desires to take 
 up the draft and papers prior to maturity, the interest will be 
 rebated proportionately. 
 
 Acceptances Not Detrimental to Credit System 
 
 Another objection that has been urged against acceptances is 
 that they would prove a detriment to the credit system. 
 
 For the sake of argument, contend those who regard accept- 
 ances as undesirable from that point of view, take the case of a 
 small manufacturer — in the cloak and suit business, for example. 
 His business represents a $10,000 investment. His assets consist 
 of outstanding accounts, $5,000; merchandise, $2,800; cash, $1,000, 
 and fixtures, $1,200. He owes $4,000 to merchandise creditors. 
 He is doing a business of $50,000 a year, and makes a fair profit. 
 The trade acceptance idea strikes him favorably, and he takes ac- 
 ceptances for the goods he sells, receiving them on the delivery 
 of the merchandise. He suddenly awakens to the fact that he has 
 $5,000 worth of negotiable paper on hand, instead of that much 
 in open accounts outstanding. He borrows money from the bank 
 on these acceptances. He begins to see possibilities of doubling 
 or even trebling his profits if he can get enough cash to operate 
 with. He has no excess orders on hand, nor are there any in 
 sight to warrant his expansion. He takes the $5,000 he has re- 
 ceived for his acceptances and buys more merchandise, increasing 
 his liabilities. He moves into larger quarters and adds to his over- 
 head expense. 
 
 Result of Unwarranted Expansion 
 
 Meanwhile, the orders have not been coming in as fast as he 
 expected or hoped, and he realizes that he is overstocked. He 
 becomes alarmed and begins sacrificing his merchandise, with the 
 result that he soon finds himself a heavy loser. His notes are 
 falling due and he cannot meet them. A meeting of his creditors 
 is called. The bank is not particularly interested, for it is well 
 secured and is not likely to lose anything. Other creditors settle 
 
 — 30 — 
 
for about 30 cents on the dollar. If the manufacturer had not been 
 able to hypothecate his outstanding accounts, claim those who argue 
 along this line, he would not have failed. 
 
 That such an argument is fundamentally wrong, and that it is 
 the man and not the system that is to blame, will be obvious to 
 anyone who considers this hypothetical case. The manufacturer, 
 of course, should have used the $5,000 he realized from his accept- 
 ances to pay his $4,000 outstanding debts, thus strengthening his 
 credit standing. With the $1,000 balance he could have safely 
 bought more merchandise without overstocking. It was the 
 course that he followed — not the manner in which he obtained 
 the money — that led to his financial downfall. 
 
 One of the duties of every merchant or credit man is to guard 
 against things of this sort — to prevent unwarranted expansion bj' 
 refusing to sell larger quantities of merchandise unless the pro- 
 spective buyer can produce definite evidence that enlargement is 
 justified. 
 
 Trade Acceptance Aid to Sound Banking 
 
 In the discount markets of Europe, the volume of acceptances 
 put forth by every individual, firm or corporation is closely 
 watched, and every attempt at over-expansion is checked by the 
 market itself. A man whose bills are regarded as having reached 
 the safe maximum indicated by the size and character of his busi- 
 ness soon finds that if he tries to exceed his limit, as set by the 
 general judgment of others, there are fewer and fewer buyers 
 for his acceptances. In fact, the volume of credit and its intrinsic 
 worth is regulated by the banker, who, as a governor of credit, 
 can control both the quantity and the quality. 
 
 The particular function of banking in connection with accept- 
 ances and other kinds of commercial paper is to collect the various 
 obligations and "clear" the transactions as the clearing house clears 
 checks. Debtors and creditors are constantly trying to get to- 
 gether and write olT their obligations against each other. The trade 
 acceptance, as it affords the banker a check on both the buyer and 
 the seller, is a far greater aid to sound banking than the promissory 
 note. With this new credit instrument, the American banker will 
 be able to safeguard, as never before, the interests of his clients, 
 as well as his own. 
 
 — 31 — 
 
Chapter VI 
 DEVELOPING THE MARKET FOR ACCEPTANCES 
 
 THE market for acceptances in this country is still in its in- 
 fancy, but the indications are that its development will be 
 steady, and along the lines of the great discount centers of Europe. 
 In London, Paris and Berlin, th^ eyes of the financial community 
 are always closely fixed on the discount rate. In New York, up to 
 the time acceptances began to be traded in, the governing rate 
 was for day-to-day loans on the Stock Exchange. The disadvan- 
 tage of this, as compared with the European system and with the 
 Federal Reserve System, is that the latter bear a very decided 
 relation to trade conditions. The fluctuations of the market for 
 acceptances and bills of exchange generally depend primarily on 
 the demand for and the supply of bills which owe their origin to 
 trade transactions, as balanced against the demand for and the sup- 
 ply of money. If trade is active, the supply of bills becomes large 
 and the absorption of loanable funds of the banks is rapid. As these 
 surplus funds become less and less, the discount rate advances. If 
 trade is slack, acceptances become fewer, the competition for them 
 in the discount market is more keen and the rate of discount de- 
 clines. Low rates are an incentive to business, and advancing 
 rates act as a natural check. The New York call loan rate, on the 
 other hand, bears only an indirect relation to trade conditions, as 
 it registers mainly the speculative and investment demand for 
 stocks. 
 
 Report of New York Federal Reserve Bank 
 
 The first annual report of the Federal Reserve Bank of New 
 York, covering a period of about fifteen months, or from October 
 
 — 32 — 
 
5, 1914, to the close of business on December 31, 1915, discusses 
 from the viewpoint of experience the working out of the Federal 
 Reserve Act as regards acceptances. It says : 
 
 "The influence of this bank on interest rates and the ex- 
 pansion and contraction of credits is likely to be exercised 
 more through its open-market operations than through the re- 
 discounts of the member banks, or of other Federal reserve 
 banks ... It should be the policy of reserve banks to 
 maintain a fairly stable rate on such paper (bankers' accept- 
 ances and other bills purchased in the open market). Then in 
 times of expansion or demand for credit, when market rates 
 rise above theirs, such paper will flow into them in substantial 
 volume and the gold released in payment will find its way into 
 the reserves of member and other banks, increasing their credit 
 power and checking extreme advances in rates. In times of 
 contraction or abundant credit, when market rates fall below 
 those of the reserve banks, the investments of the latter will 
 be absorbed as they mature, by banks and other institutions, 
 thereby transferring gold from their reserves to the reserve 
 banks, reducing the credit power of the member banks and 
 checking extreme declines in rates. 
 
 "Similarly, if a sufficient volume of bankers' acceptances 
 based on imports and exports is developed to create a stable 
 discount market in New York or elsewhere in the United 
 States, an international ebb and flow may be effected. When 
 the dollar acceptance reaches a degree of currency comparable 
 with that of the sterling acceptance, its use will depend largely 
 upon whether, on arrival in New York, it can be discounted at 
 a rate lower than the rate for sterling acceptances in London. 
 Those engaged in international business will draw on the city 
 where their drafts can be discounted at the lowest rate. 
 
 "Through the creation of the banker's acceptance, an in- 
 ternational credit instrument has been introduced into our bank- 
 ing system which, when developed, is likely to prove a potent 
 influence in regulating the flow of credit between Europe and 
 America. It should enable America, in normal times, to regulate 
 its credit position primarily by recourse to the European market, 
 thereby rendering domestic rate fluctuations less violent. Greater 
 stabilization of interest rates is one of the most valuable con- 
 tributions the system is capable of making to the orderly prog- 
 ress of business. 
 
 "The reserve bank and the market rate for the discount of 
 such bills in New York has been for nearly a year and is now 
 lower than the rate for similar bills in London. The relatively 
 small volume of such credits which American banks have sue- 
 
 — 33 — 
 
ceeded in making operative even under the unusually favorable 
 opportunity which the war presents for their extension is evi- 
 dence of the difficulty which will be encountered in developing 
 the acceptance business in the United States. Some of the 
 fundamental difficulties are: 
 
 "(1) The disinclination to break old banking connections. 
 
 "(2) The difficulty of educating handlers of bills in distant 
 places as to American credits. 
 
 "(3) The lack of bill buyers in foreign countries who will 
 quote as low rates on dollar as on sterling bills. 
 
 "(4) The natural prejudice of bill buyers in foreign coun- 
 tries in favor of a bill of known currency and against a bill of 
 as yet unknown currency. 
 
 "(5) The lack of men trained to exercise the judgment and 
 financial responsibility required of them as managers of branches 
 or agencies which American banks might establish in foreign 
 countries. 
 
 "(6) The inferior communications for both goods and mails 
 between the United States and foreign countries as compared with 
 those between Great Britain and foreign countries. 
 
 "Only time, experience, and patient effort will remove these 
 handicaps to the elevation of dollar exchange to its proper posi- 
 tion in international finance. The business, however, is developing 
 and will continue to grow as our banking machinery and connec- 
 tions extend throughout the world. 
 
 "The Act permits member banks to accept an amount of bills 
 not exceeding 50 per cent, of their capital and surplus. By the 
 amendment of March 3, 1915, under certain conditions they may 
 be authorized by the Federal Reserve Board to accept up to 100 
 per cent, of the capital and surplus. 
 
 "As this bank has probably been the largest single purchaser 
 of bankers' acceptances, it has been able, as it gained experience, 
 to exert some influence toward standardizing practice and form. 
 The acceptance of drafts in one city payable in another city has 
 been discouraged; insistence that bills shall be so indorsed as to 
 leave open no question of title will, when universally adopted, add 
 greatly to the ready negotiability of bills; and discussion of the 
 terms of the regulation with acceptors and bill brokers has led to 
 a better understanding of the scope of the field it covers. 
 
 "The amended regulation issued September 7, 1915, consid- 
 erably broadened the field of acceptances eligible for purchase 
 and encouraged an increased volume of these instruments. The 
 further amended regulation issued December 4, 1915, covering the 
 purchase of bankers' acceptances arising out of domestic trans- 
 actions relates to a class of bills which national banks are not 
 authorized to accept. When accepted by institutions of high credit, 
 they have a ready market, though at a fractionally higher rate than 
 acceptances based on foreign transactions." 
 
 — 34 — 
 
The American Exchange National Bank was one of the first 
 members of the Federal Reserve System to apply for and receive 
 authority to accept bills up to 100 per cent, of its capital and sur- 
 plus of $8,000,000, which has since been increased to $10,000,000. 
 
 Acceptances Benefit Both Buyer and Seller 
 
 The trade acceptance is advantageous alike to the seller and 
 to the buyer of goods. It brings about a closer relationship be- 
 tween them and inspires the greater mutual confidence which is 
 the basis of all commerce and credit. It enables the seller to 
 dispose of his goods to better advantage, because it affords him 
 increased and improved facilities for financing his business through 
 the possession of available and liquid credit. Each buyer is him- 
 self a seller; each seller is himself a buyer. Therefore, the trade 
 acceptance benefits both in an equal degree. It gives neither an 
 actual advantage over the other. 
 
 The trade acceptance give both buyer and seller a better and 
 stronger sense of responsibility regarding their obligations, not 
 only to each other, but also to the banks that aid them in their 
 business. The trade acceptance does not decrease buying power; 
 it is a safeguard against over-buying. 
 
 General Use of Acceptances Urged 
 
 The trade acceptance enables business to be transacted at a 
 smaller operating cost. It reduces the amount of losses through 
 bad debts. It affords adequate relief from the tendency to take 
 so-called cash discounts after their legitimate term has expired. 
 
 Employed properly and consistently, the trade acceptance will 
 give every merchant or manufacturer a bigger and better place 
 in the business world. 
 
 The trade acceptance should come into common use in the 
 United States. It is not an experiment. It has been employed 
 for generations in other countries, and has taken a vital part in the 
 development and expansion of their commercial and financial life. 
 Not until the trade acceptance is generally understood, and is as 
 universally used here as it is abroad, are we to reap the full benefits 
 of the Federal Reserve System. 
 
 — 35 — 
 
Broadening the Market for Acceptances 
 
 The market for acceptances has been considerably broadened 
 by the enactment of an amendment to the banking laws of New 
 York State and other States, permitting savings banks, under the 
 specified conditions, to invest in acceptances. The amendment to 
 the New York State law, which became effective on April 22, 1918, 
 is as follows: 
 
 "^Bankers' acceptances and bills of exchange of the kind and 
 maturities made eligible by law for rediscount with Federal reserve 
 banks, provided the same are accepted by a bank, national banking 
 association or trust company, incorporated under the laws of the 
 State of New York or under the laws of the United States and 
 having its principal place of business in the State of New York. 
 Not more than twenty per centum of the assets of any savings 
 bank, less the amount of the available fund held pursuant to the 
 provisions of Section 251 of this Chapter, shall be invested in such 
 acceptances. The aggregate amount of the liability of any bank, 
 national banking association or trust company to any savings bank 
 for acceptances held by such savings bank and deposits made with 
 it shall not exceed twenty-five per centum of the paid-up capital and 
 surplus of such bank, national banking association or trust com- 
 pany, and not more than five per centum of the aggregate amount 
 credited to the depositors of any savings bank shall be invested in 
 the acceptances of or deposited with a bank, national banking 
 association or trust company of which a trustee of such savings 
 bank is a director." 
 
 Growth of Acceptance Operations 
 
 The development of the market for acceptances in this country 
 is illustrated in the fifth annual report of the Federal Reserve Bank 
 of New York, covering the calendar year 1919. In that part of the 
 report relating to acceptances and the discount market, the pur- 
 chases of bankers' acceptances and indorsed trade bills by the 
 bank for its own account and for the account of other Federal 
 reserve banks are given by months, and indicate a combined aggre- 
 gate of more than $1,960,000,000 for the year. While there was a 
 natural fluctuation in the volume of these operations, the general 
 tendency was unmistakably in the direction of expansion, and it is 
 also significant that the amount of domestic trade bills discounted 
 and purchased by the bank increased nearly $14,000,000 over the 
 1918 total. 
 
 — 36 — 
 
In its report covering operations for the year 1920, the Federal 
 Reserve Board reviews the further development of the acceptance 
 market during that period, in part, as follows : 
 
 "Appreciable progress has been made during the past year 
 in the development and broadening of the market for bankers' 
 acceptances. 
 
 "The purchases of bankers' acceptances by all the Federal 
 reserve banks were larger during 1920 by approximately $300,- 
 000,000 than in 1919. This increase is not excessive or remark- 
 able, however, when consideration is given to the large volume 
 of business transacted which called for acceptance credits by 
 banks and bankers. The principal market into which bankers' 
 acceptances flow from the entire country is New York, and it 
 follows, therefore, that the Federal Reserve Bank of New York 
 must bear the brunt of the burden of sustaining and developing 
 the market. This bank during 1920 purchased bankers' accept- 
 ances for its own account and for the account of other Federal 
 reserve banks in value about $447,326,000 greater than in 1919, 
 this increase for the New York bank being largely ofTset by 
 decreases in amounts of open-market purchases by other Federal 
 reserve banks within their own -districts. 
 
 "The pressure upon the Federal Reserve Bank of New York, 
 caused by these purchases, has been relieved and distribution of 
 bills effected by sales to member banks and by allotments to 
 other Federal reserve banks. The development of the accept- 
 ance market in New York has been aided, also, by special accept- 
 ance service offered to its member banks by the Federal Reserve 
 Bank of New York. The bank purchases for its member banks 
 indorsed bills of the kinds and maturities which it is accustomed 
 to purchase for its own account, carries them in custody, sells 
 them when desired, and collects them at maturity. This service 
 is rendered without charge, and has made it easy for any member 
 bank to keep excess funds employed constantly and profitably 
 through continued or occasional investments in prime bills." 
 
 - 37-- 
 
Chapter VII 
 
 AMENDMENTS TO THE FEDERAL RESERVE ACT 
 
 IMPORTANT amendments, affecting acceptances, were made to 
 the Federal Reserve Act, and became effective on September 7, 
 1916, and on June 21, 1917, on their approval by the President. 
 Subsequent amendments to the Act are discussed further along in 
 this chapter, beginning on page 43. 
 
 Section 13 of the Act relates particularly to commercial paper. 
 The changes made therein widen considerably the field of banking 
 activity, especially as regards domestic acceptances and bills of 
 exchange. The amendments, therefore, are of noteworthy interest, 
 not only to the financial institutions directly concerned, but to all 
 classes of trade and industry doing business with them. In this 
 and the following paragraphs quoting these amendments, the 
 changes from the wording of the original Act of December 23, 1913. 
 are indicated by the new matter being set in heavier type, the words 
 stricken out being enclosed in brackets : 
 
 "Any Federal reserve bank may receive from any of its 
 member banks, and from the United States, deposits of current 
 funds in lawful money, national-bank notes, Federal reserve 
 notes, or checks, and drafts [upon solvent-member banks], 
 payable upon presentation, and also, for collection, maturing 
 notes and bills; or, solely for purposes of exchange or of col- 
 lection, [purposes] may receive from other Federal reserve 
 banks deposits of current funds in lawful money, national-bank 
 notes, or checks [and drafts] upon [solvent-member or] other 
 Federal reserve banks, and checks and drafts, payable upon 
 presentation within its district, and maturing notes and bills 
 payable within its district; or, solely for the purposes of ex- 
 change or of collection, may receive from any non-member 
 bank or trust company deposits of current funds in lawful 
 money, national-bank notes. Federal reserve notes, checks and 
 
 — 38 — 
 
drafts payable upon presentation, or maturing notes and bills: 
 Provided, Such non-member bank or trust company maintains 
 with the Federal reserve bank of its district a balance suffi- 
 cient to offset the items in transit held for its account by the 
 Federal reserve bank: Provided further. That nothing in this 
 or any other section of this Act shall be construed as prohib- 
 iting a member or non-member bank from making reasonable 
 charges, to be determined and regulated by the Federal Re- 
 serve Board, but in no case to exceed 10 cents per $100 or frac- 
 tion thereof, based on the total of checks and drafts presented 
 at any one time, for collection or payment of checks and drafts 
 and remission therefor by exchange or otherw^ise; but no such 
 charges shall be made against the Federal reserve banks. 
 
 "Upon the indorsement of any of its member banks, which 
 shall be deemed [with] a waiver of demand, notice and protest 
 by such bank as to its own indorsement exclusively, any Fed- 
 eral reserve bank may discount notes, drafts, and bills of ex- 
 change arising out of actual commercial transactions; that is, 
 notes, drafts, and bills of exchange issued or drawn for agri- 
 cultural, industrial, or commercial purposes, or the proceeds of 
 which have been used, or are to be used, for such purposes, 
 the Federal Reserve Board to have the right to determine or 
 define the character of the paper thus eligible for discount, 
 within the meaning of this Act. Nothing in this Act contained 
 shall be construed to prohibit such notes, drafts, and bills of 
 exchange , secured by staple agricultural products, or other 
 goods, wares, or merchandise from being eligible for such dis- 
 count; but such definition shall not include notes, drafts, or 
 bills covering merely investments or issued or drawn for the 
 purpose of carrying or trading in stocks, bonds, or other in- 
 vestment securities, except bonds and notes of the Govern- 
 ment of the United States. Notes, drafts, and bills admitted- to 
 discount under the terms of this paragraph must have a ma- 
 turity at the time of discount of not more than ninety days, 
 exclusive of days of grace; 
 
 "Provided, That notes, drafts, and bills drawn or issued for 
 agricultural purposes or based on live stock and having a ma- 
 turity not exceeding six months, exclusive of days of grace, 
 may be discounted in an amount to be limited to a percentage 
 of the [capital] assets of the Federal reserve bank, to be ascer- 
 tained and fixed by the Federal Reserve Board." 
 
 The next succeeding paragrapli of the original Act, beginning: 
 "Any Federal reserve bank may discount acceptances which are 
 based on the importation or exportation of goods," etc., is stricken 
 out entirely. 
 
 — 39 — 
 
The paragraph that follows is changed as indicated by the type 
 
 "The aggregate of such notes, drafts, and bills bearing the 
 signature or indorsement of any one borrower, whether a per- 
 son, company, firm, or corporation, rediscounted for any one 
 bank, shall at no time exceed ten per centum of the unimpaired 
 capital and surplus of said bank; but this restriction sliall 
 not apply to the discount of bills of exchange drawn in good 
 faith against actually existing values." 
 
 The next paragraph is entirely new : 
 
 "Any Federal reserve bank may discount acceptances of 
 the kinds hereinafter described, which have a maturity at the 
 time of discount of not more than three months' sight, ex- 
 clusive of days of grace, and which are indorsed by at least 
 one member bank." 
 
 Banks May Now Accept in Domestic Transactions 
 
 It will be seen that the paragraph which next follows has 
 been decidedly changed. In its original form, it authorized the 
 acceptance of drafts or bills of exchange only when they originated 
 in transactions involving the importation and exportation of goods. 
 As amended, this portion of the lavv^ now permits banks, under 
 the conditions specified, also to accept similar commercial paper 
 growing out of transactions involving the domestic shipment of 
 goods. This, it is obvious, broadens to a remarkable degree the field 
 for the use of trade acceptances. The paragraph, with the addi- 
 tions and changes shown, reads as follows : 
 
 "Any member bank may accept drafts or bills of exchange 
 drawn upon it [and growing out of transactions involving 
 the importation or exportation of goods] having not more 
 than six months' sight to run, exclusive of days of grace, which 
 grow out of transactions involving the importation or exporta- 
 tion of goods; or which grow out of transactions involving 
 the domestic shipment of goods, provided shipping documents 
 conveying or securing title are attached at the time of accept- 
 ance; or which are secured at the time of acceptance by a 
 warehouse receipt or other such document conveying or secur- 
 ing title covering readily-marketable staples. No member 
 bank shall accept, v/hether in a foreign or domestic transac- 
 tion, for any one person, company, firm, or corporation to an 
 
 — 40 — 
 
amount equal at any time in the aggregate to more than ten 
 per centum of its paid-up and unimpaired capital stock and 
 surplus, unless the bank is secured either by attached docu- 
 ments or by some other actual security growing out of the 
 same transaction as the acceptance; and [but] no bank shall 
 accept such bills to an amount equal at any time in the aggre- 
 gate to more than one-half of its paid-up and unimpaired 
 capital stock and surplus: Provided, however, That the Fed- 
 eral Reserve Board, under such general regulations as it may 
 prescribe, which shall apply to all banks aUke regardless of 
 the amount of capital stock and surplus, may authorize any 
 member bank to accept such bills to an amount not exceed- 
 ing at any time in the aggregate one hundred per centum of 
 its paid-up and unimpaired capital stock and surplus: Pro- 
 vided, further. That the aggregate of acceptances growing out 
 of domestic transactions shall in no event exceed fifty per 
 centum of such capital stock and surplus." 
 
 Authorized Collateral for Reserve Bank Advances 
 
 Then comes another entirely new paragraph defining the man- 
 ner in which one bank may lend to another on the security of notes, 
 drafts, bills of exchange, bankers' acceptances, or other authorized 
 collateral. It reads : 
 
 "Any Federal reserve bank may make advances to its mem- 
 ber banks on their promissory notes for a period not exceed- 
 ing fifteen days at rates to be established by such Federal 
 reserve banks, subject to the review and determination of the 
 Federal Reserve Board, provided such promissory notes are 
 secured by such notes, drafts, bills of exchange, or bankers' 
 acceptances as are eligible for rediscount or for purchase by 
 Federal reserve banks under the provisions of this Act, or by 
 the deposit or pledge of bonds or notes of the United States." 
 
 The next paragraph regarding the amendment of Section 5202 
 of the Revised Statutes of the United States remains unchanged. 
 The section that follows is changed slightly to make it cover the 
 widened purposes of the Act: 
 
 "The discount and rediscount a'nd the purchase and sale 
 by any Federal reserve bank of any bills receivable and of 
 domestic and foreign bills of exchange, and of acceptances 
 authorized by this Act, shall be subject to such restrictions, 
 limitations, and regulations as may be imposed by the Federal 
 Reserve Board." 
 
 — 41 — 
 
Possibilities for Extension of "Dollar Exchange'' 
 
 The paragraph which follows is also new, and opens greater 
 possibilities for the extension of "dollar exchange" in commercial 
 transactions with other countries. As has been previously shown, 
 "dollar exchange" gives the American exporter an advantage that 
 he has never before enjoyed — that of dealing with foreign buyers 
 and sellers in his own domestic currency, thereby saving the extra 
 cost of exchange on London, or the other great commercial centers 
 abroad, and other expenses. This section of the Act reads as 
 follows : 
 
 "Any member bank may accept drafts or bills of exchange 
 drawn upon it having not more than three months' sight to 
 run, exclusive of days of grace, drawn under regulations to be 
 prescribed by the Federal Reserve Board by banks or bankers 
 in foreign countries or dependencies or insular possessions of 
 the United States for the purpose of furnishing dollar exchange 
 as required by the usages of trade in the respective countries, 
 dependencies, or insular possessions. Such drafts or bills may 
 be acquired by Federal reserve banks in such amounts and sub- 
 ject to such regulations, restrictions, and limitations as may 
 be prescribed by the Federal Reserve Board: Provided, however. 
 That no member bank shall accept such drafts or bills of 
 exchange referred to in this paragraph for any one bank to an 
 amount exceeding ih the aggregate ten per centum of the paid-up 
 and unimpaired capital and surplus of the accepting bank unless 
 the draft or bill of exchange is accompanied by documents con- 
 veying or securing title or by some other adequate security: 
 Provided, further, That no member bank shall accept such 
 drafts or bills in an amount exceeding at any time the aggre- 
 gate of one-half of its paid-up and unimpaired capital and 
 surplus." 
 
 Sub-section (e) of Section 14 of the original Act is changed 
 as indicated herewith : 
 
 Establishment of Banking Connections 
 
 "(e) To establish accounts with other Federal reserve 
 banks for exchange purposes and, with the consent [of the 
 Federal Reserve Board] or upon the order and direction of 
 the Federal Reserve Board and under regulations to be pre- 
 scribed by said Board, to open and maintain [banking] ac- 
 
 — 42 — 
 
counts in foreign countries, appoint correspondents, and estab- 
 lish agencies in such countries wheresoever it may be deemed 
 best for the purpose of purchasing, selhng, and collecting 
 bills of exchange, and to buy and sell, with or without its 
 indorsement, through such correspondents or agencies, bills of 
 exchange (or acceptances) arising out of actual commercial 
 transactions which have not more than ninety days to run, 
 exclusive of days of grace, and which bear the signature of 
 two or more responsible parties, and, with the consent of the 
 Federal Reserve Board, to open and maintain banking ac- 
 counts for such foreign correspondents or agencies. When- 
 ever any such account has been opened or agency or corre- 
 spondent has been appointed by a Federal reserve bank, with 
 the consent of or imder the order and direction of the Federal 
 Reserve Board, any other Federal reserve bank may, with the 
 consent and approval of the Federal Reserve Board, be per-^ 
 mitted to carry on or conduct, through the Federal reserve 
 bank opening such account or appointing such agency or cor- 
 respondent, any transaction authorized by this section under 
 rules and regulations to be prescribed by the Board." 
 
 The second paragraph of Section 16 is amplified by adding 
 drafts, bills of exchange, or acceptances to the collateral security 
 that may be offered for Federal reserve notes. 
 
 Additional Amendments to the Act 
 
 Several amendments to the Federal Reserve Act and to the 
 Revised Statutes vi^ere made during the year 1918, but these 
 changes do not call for extended comment here. 
 
 Under the terms of Section 13 of the Act approved April 5, 
 1918, known as the War Finance Act, the Federal reserve banks 
 were authorized to discount direct obligations of member banks 
 secured by bonds of the War Finance Corporation, and to use notes 
 so secured, if it became necessary, as a basis for Federal reserve 
 notes. Section 15 empowered the Federal reserve banks to act as 
 fiscal agents and depositaries of the War Finance Corporation, 
 while Section 20 amended Section 5202, Revised Statutes, so as to 
 exempt from the liabilities which may be incurred by a national 
 bank those incurred under the provisions of the War Finance Act. 
 
 The Act of September 24, 1918, amended Section 5200, Re- 
 vised Statutes, which section limits the amount that may be loaned 
 
 — 43 — 
 
by any national bank to any one person to 10 per cent, of the capital 
 and surplus of the lending bank. By the new amendment, loans 
 secured by Liberty bonds were made exempt under certain condi- 
 tions from this limitation. The Trading with the Enemy Act, as 
 amended September 24, 1918, authorized the President to use such 
 agencies as he might select to regulate foreign exchange operations. 
 This was essentially a war measure, and is no longer in use. 
 
 Other amendments to the Federal Reserve Act that were made 
 efifective in 1918 have no direct bearing on the subject of which this 
 booklet treats. 
 
 Reserve Banks' Discount Powers Broadened 
 
 During 1919, the Act was amended three times, while further 
 changes were made in different sections of the Revised Statutes. 
 
 By the substitution of a new subsection (m), approved March 3, 
 1919, Section 11 of the Federal Reserve Act was amended so as 
 to authorize the Federal Reserve Board, upon the affirmative vote 
 of not less than five of its members, to permit Federal reserve banks 
 to discount for any member bank paper bearing the signature 
 or indorsement of any one borrower in excess of the amount there- 
 tofore permitted under Section 9 and Section 13 of the Act. The 
 amendment provided, however, that in no case should the paper so 
 discounted exceed 20 per cent, of the member bank's capital and 
 surplus, and it was also stipulated that all of the paper discounted 
 for any member bank in excess of the amount theretofore per- 
 mitted by law should be secured by not less than a like face amount 
 of bonds or notes of the United States issued since April 24, 1917, 
 or by certificates of indebtedness of the United States. 
 
 This amendment, which was designed to broaden the dis- 
 count powers of Federal reserve banks to correspond to the lend- 
 ing power of the national banks as enlarged by the Act of Septem- 
 ber 24, 1918, became inoperative after December 31, 1920. Prior to 
 the latter date, however, a new amendment, extending the provision 
 permitting Federal reserve banks to discount for a member bank, 
 under the specified conditions, paper up to 20 per cent, of the mem- 
 ber bank's capital and surplus, was introduced in Congress. After 
 considerable delay, this amendment was passed by both the House 
 
 — 44 — 
 
and Senate, and became a law on February 27, 1921, upon its 
 approval by the President. The new amendment stipulates that 
 paper discounted for any member bank in excess of the amount 
 permitted under Section 9 and Section 13 shall be secured by not 
 less than a like face amount of bonds or notes of the United States 
 issued since April 24, 1917, "for which the borrower shall in good 
 faith prior to January 1, 1921, have paid or agreed to pay not less 
 than the full face amount thereof," or certificates of indebtedness 
 of the United States. The provisions of this new subsection (m), 
 it is important to note, become inoperative after October 31, 1921. 
 
 Investments of National Banks 
 
 The Act of September 17, 1919, amended Section 25 so as to 
 permit any national banking association, until January 1, 1921, 
 irrespective of the amount of its capital and surplus, to apply to 
 the Federal Reserve Board for permission to invest an amount not 
 exceeding in the aggregate 5 per cent, of its capital and surplus in 
 the stock of one or more corporations chartered or incorporated 
 under the laws of the United States or of any State thereof and 
 principally engaged in such phases of international or foreign 
 financial operations as may be necessary to facilitate the export 
 of goods. This 5 per cent, limit was changed by the enactment of 
 Section 25 (a), so far as corporations organized under Federal law 
 are concerned. The latter Act, known as the Edge Bill, permits 
 any national banking association to invest a larger amount than 
 5 per cent, in the stock of any corporation organized under its pro- 
 visions, but the aggregate amount of stock held in all corporations 
 engaged in business of the kind described in the Act and in Section 
 25, as amended, shall not exceed 10 per cent, of the subscribing 
 bank's capital and surplus. A part of Section 25, as amended by 
 the Act of September 17, 1919, reads as follows : 
 
 "Until January 1, 1921, any national banking association, 
 without regard to the amount of its capital and surplus, may file 
 application with the Federal Reserve Board for permission, upon 
 such conditions and under such regulations as may be prescribed 
 by said Board, to invest an amount not exceeding in the aggre- 
 gate 5 per centum of its paid-in capital and surplus in the stock 
 of one or more corporations chartered or incorporated under the 
 
 — 45 — 
 
laws of the United States or of any State thereof, and, regard- 
 less of its location, principally engaged in such phases of inter- 
 national or foreign financial operations as may be necessary to 
 facilitate the export of goods, wares, or merchandise from the 
 United States or any of its dependencies or insular possessions 
 to any foreign country: Provided, however, That in no event 
 shall the total investments authorized by this section by any one 
 national bank exceed 10 per centum of its capital and surplus." 
 
 The Act known as the Edge Bill, which was approved 
 December 24, 1919, is discussed at length in Chapter X of this 
 booklet, and consequently is not given here. 
 
 Amendments to Revised Statutes 
 
 Besides the amendments to the Federal Reserve Act previously 
 discussed, changes in Section 5200 and Section 5202 of the Revised 
 Statutes were made by the Act approved October 22, 1919. 
 
 As amended. Section 5200, Revised Statutes, permits a national 
 bank to lend to any one borrower in excess of 10 per cent, of its 
 capital and surplus, but not to exceed 25 per cent. It is provided 
 that loans over and above 10 per cent, must be represented by notes 
 secured by shipping documents, warehouse receipts, or other such 
 documents conveying or securing title covering readily-marketable, 
 non-perishable staples, including live stock. The actual market 
 value of the property securing the obligation must not at any time 
 be less than 115 per cent, of the face amount of the loan, and the 
 property must be fully covered by insurance. It is stipulated in the 
 Act, moreover, that the privilege of lending in excess of 10 per 
 cent, of the bank's capital and surplus upon notes secured in the 
 manner described shall not apply to any one borrower for more 
 than six months in any consecutive twelve months. Section 5200 
 of the Revised Statutes, as amended, reads as follows : 
 
 "The total liabilities to any association of any person or of 
 any company, corporation, or firm for money borrowed, in- 
 cluding in the liabilities of a company or firm the liabilities 
 of the several members thereof, shall at no time exceed 10 per 
 centum of the amount of the capital stock of such association, 
 actually paid in and unimpaired, and 10 per centum of its un- 
 impaired surplus fund: Provided, however, That (1) the discount 
 
 — 46 — 
 
of bills of exchange drawn in good faith against actually exists 
 ing values, including drafts and bills of exchange secured by 
 shipping documents conveying or securing title to goods shipped, 
 and including demand obligations when secured by documents 
 covering commodities in actual process of shipment, and also in- 
 cluding bankers' acceptances of the kinds described in Section 13 
 of the Federal Reserve Act, (2) the discount of commercial or 
 business paper actually owned by the person, company, cor- 
 poration, or firm negotiating the same, (3) the discount of notes 
 secured by shipping documents, warehouse receipts, or other 
 such documents conveying or securing title covering readily- 
 marketable, non-perishable staples, including live stock, when the 
 actual market value of the property securing the obligation is 
 not at any time less than 115 per centum of the face amount of 
 the notes secured by such documents and when such property 
 is fully covered by insurance, and (4) the discount of any note 
 or notes secured by not less than a like face amount of bonds or 
 notes of the United States issued since April 24, 1917, or certifi- 
 cates of indebtedness of the United States, shall not be consid- 
 ered as money borrowed within the meaning of this section. 
 
 "The total liabilities to any association, of any person or of 
 any corporation, or firm, or company, or the several members 
 thereof upon any note or notes purchased or discounted by 
 such association and secured by bonds, notes, or certificates 
 of indebtedness as described in (4) hereof shall not exceed 
 ("except to the extent permitted by rules and regulations pre- 
 scribed by the Comptroller of the Currency, with the approval 
 of the Secretary of the Treasury) 10 per centum of such capital 
 stock and surplus fund of such association and the total lia- 
 bilities to any association of any person or of any corporation, 
 or firm, or company, or the several members thereof for money 
 borrowed, including the liabilities upon notes secured in the 
 manner described under (3) hereof, except transactions (1), (2), 
 and (4), shall not at any time exceed 25 per centum of the 
 amount of the association's paid-in and unimpaired capital stock 
 and surplus. The exception made under (3) hereof shall not 
 apply to the notes of any one person, corporation, or firm or 
 company, or the several members thereof for more than six 
 months in any consecutive twelve months." 
 
 The Act of October 22, 1919, also amended Section 5202. 
 Revised Statutes, by excepting from the limitations upon the 
 amount for which any national bank may be liable at any one time 
 those "liabilities created by the indorsement of accepted bills of 
 exchange payable abroad actually owned by the indorsing bank and 
 discounted at home or abroad." 
 
 — 47 — 
 
Controlling Credit Through Discount Rates 
 
 In discussing the question of regulation and control of credit 
 in its annual report for 1919, the Federal Reserve Board made the 
 recommendation that an additional power be granted it through 
 the insertion of a clause in subdivision (d), Section 14 of the 
 Federal Reserve Act, providing that each Federal reserve bank, 
 with the approval of the Board, be permitted to determine by uni- 
 form rule, applicable to all its member banks alike, the normal 
 maximum rediscount line of each member bank. It was further 
 suggested that each Federal reserve bank be allowed to submit for 
 the review and determination of the Board graduated rates on an 
 ascending scale to apply equally and ratably to all its member 
 banks rediscounting amounts in excess of the normal line so 
 determined. 
 
 The opinion was expressed by the Board that it would thus be 
 possible to curtail excessive borrowings of member banks, and to 
 induce them to hold their own large borrowers in check without 
 advancing the basic rate. There was then no authority, the Board 
 pointed out, for fixing graduated rates based upon the total borrow- 
 ings of a member bank, so that if it became necessary to increase 
 the discount rate in order to curb the demands of those banks re- 
 discounting in very large amounts, the same rate would apply to 
 the requirements of other member banks who might rediscount 
 infrequently, and never excessively. Hence, the raising of rates as 
 a corrective to certain banks tended to work a hardship on banks 
 and borrowers who were conducting their affairs within the limits 
 of moderation. 
 
 The recommendations of the Federal Reserve Board in the 
 matter of the control of credit, as previously outlined, were finally 
 incorporated in a bill — the Phelan Bill — and on April 13, 1920, this 
 measure was made a law upon its approval by the President. As 
 enacted, the amendment to Section 14 reads as follows : 
 
 "That Section 14 of the Federal Reserve Act as amended 
 by the Acts approved September 7, 1916, and June 21, 1917, 
 be further amended by striking out the semicolon after the 
 word 'business' at the end of subparagraph (d) and insert in 
 lieu thereof the following: 'and which, subject to the approval, 
 review, and determination of the Federal Reserve Board, may 
 be graduated or progressed on the basis of the amount of the 
 
 — 48 — 
 
advances and discount accommodations extended by the Fed- 
 eral reserve bank to the borrowing bank.'" 
 
 It is important to note that this new provision is permissive, 
 and not mandatory, its purpose being to authorize Federal reserve 
 banks, subject to the approval of the Federal Reserve Board, to 
 establish a "line of credit" or discount accommodation for each 
 member bank. Where banks exceed this limit in their applications, 
 it is intended to check the undue enlargement of such applications 
 by a progressively growing rate. 
 
 — 49 — 
 
Chapter VIII 
 
 REGULATIONS OF THE FEDERAL RESERVE BOARD 
 
 THE text of the regulations issued by the Federal Reserve 
 Board relating to commercial paper is of vital interest to mer- 
 chants and manufacturers, as well as to bankers. A part of Section 
 13 of the Federal Reserve Act, as previously shown, reads as 
 follows : 
 
 "Upon the indorsement of any of its member banks, which 
 shall be deemed a waiver of demand, notice and protest by 
 such bank as to its own indorsement exclusively, any Federal 
 reserve bank may discount notes, drafts, and bills of exchange 
 arising out of actual commercial transactions; that is, notes, 
 drafts, and bills of exchange issued or drawn for agricultural, 
 industrial or commercial purposes, or the proceeds of which 
 have been used, or are to be used, for such purposes, the Fed- 
 eral Reserve Board to have the right to determine or define 
 the character of the paper thus eligible for discount, within 
 the meaning of this Act. Nothing in this Act contained shall 
 be construed to prohibit such notes, drafts, and bills of ex- 
 change, secured by staple agricultural products, or other goods, 
 wares, or merchandise from being eligible for such discount; 
 but such definition shall not include notes, drafts, or bills cov- 
 ering merely investments or issued or drawn for the purpose 
 of carrying or trading in stocks, bonds, or other investment 
 securities, except bonds and notes of the Government of the 
 United States. Notes, drafts, and bills admitted to discount 
 under the terms of this paragraph must have a maturity at the 
 time of discount of not more than ninety days, exclusive of 
 days of grace: Provided, That notes, drafts, and bills drawn 
 or issued for agricultural purposes or based on live stock and 
 having a maturity not exceeding six months, exclusive of days 
 of grace, may be discounted in an amount to be limited to the 
 percentage of the assets of the Federal reserve bank, to be 
 ascertained and fixed by the Federal Reserve Board. 
 
 — 50 — 
 
"The aggregate of such notes, drafts, and bills bearing the 
 signature or indorsement of any one borrower, whether a per- 
 son, company, firm, or corporation, rediscounted for any one 
 bank shall at no time exceed ten per centum of the unimpaired 
 capital and surplus of said bank; but this restriction shall not 
 applj' to the discount of bills of exchange drawn in good faith 
 against actually existing values. 
 
 "Any Federal reserve bank may discount acceptances of the 
 kinds hereinafter described, which have a maturity at the time 
 of discount of not more than three months' sight, exclusive of 
 days of grace, and which are indorsed by at least one member 
 bank." 
 
 The paragraph which next follows in Section 13 permits mem- 
 ber banks, under the specified conditions, to accept drafts or bills 
 of exchange growing out of transactions involving the importation 
 or exportation of goods, or the domestic shipment of goods. 
 
 "Section 14. Any Federal reserve bank may, under rules 
 and regulations prescribed by the Federal Reserve Board, pur- 
 chase and sell in the open market, at home or abroad, either 
 from or to domestic or foreign banks, firms, corporations or 
 individuals, cable transfers and bankers' acceptances and bills 
 of exchange of the kinds and maturities by this Act made eligi- 
 ble for rediscount, with or without the indorsement of a mem- 
 ber bank. 
 
 "Every Federal reserve bank shall have power: 
 
 "(c) To purchase from member banks and to sell, with or 
 without its indorsement, bills of exchange arising out of com- 
 mercial transactions, as hereinbefore defined ; 
 
 "(d) To establish from time to time, subject to review and 
 determination of the Federal Reserve Board, rates of discount 
 to be charged by the Federal reserve bank for each class of 
 paper, which shall be fixed with a view of accommodating com- 
 merce and business; 
 
 "(e) To establish accounts with other Federal reserve banks 
 for exchange purposes and, with the consent or upon the order 
 and direction of the Federal Reserve Board and under regulations 
 to be prescribed by said Board, to open and maintain accounts in 
 foreign countries, appoint correspondents, and establish agencies 
 in such countries wheresoever it may deem best for the purpose 
 of purchasing, selling and collecting bills of exchange, and to buy 
 and sell, with or without its indorsement through such correspond- 
 ents or agencies, bills of exchange (or acceptances) arising out of 
 actual commercial transactions which have not more than ninety 
 days to run, exclusive of days of grace, and which bear the signa- 
 
 -51 — 
 
ture of two or mote responsible parties, and, with the consent 
 of the Federal Reserve Board, to open and maintain banking ac- 
 counts for such foreign correspondents or agencies. . . ." 
 
 Powers of New York State Banks 
 
 In order that banks and trust companies in New York State 
 may have similar powers, the revised banking law of the State 
 permits a State bank or trust company to accept for payment at 
 a future date, drafts drawn upon it by its customers and to issue 
 letters of credit authorizing the holders thereof to draw drafts upon 
 it or its correspondents at sight or on time, not exceeding one year. 
 
 Under the New York Act, there are no restrictions as to the 
 origin of the paper. New York State banks are not limited as to 
 the amount of acceptances they may make in total, although they 
 are not allowed to loan by way of any extension of credit, by means 
 of letters of credit or by acceptances, more than one-tenth part of 
 the capital and surplus to any individual, partnership, corporation 
 or unincorporated association, etc. Banks in the Federal Reserve 
 System may not accept paper running longer than six months, 
 while New York State banks may accept up to one year. 
 
 Desirability of Bills of Exchange 
 
 From the foregoing quotation from the Federal Reserve Act, 
 it will be seen that one of its most valuable features is its re- 
 habilitation of bills of exchange by the establishment of rediscount 
 facilities. It places the banking system of the United States on 
 a similar basis to that of other civilized countries that make prime 
 commercial paper the foundation of their loan business. In its 
 interpretations of the Act, the Federal Reserve Board has ma- 
 terially assisted in the movement to educate American commerce 
 to use the bill of exchange even in small transactions. 
 
 The first regulations of the Board, issued November 10, 1914, 
 outlining its discount policy, are evidence of such intention. Un- 
 der the heading "Commercial Paper," paragraph C, the Board 
 then said: 
 
 — 52 — 
 
"Bills should be essentially self-liquidating. Safety requires 
 not only that bills held by the Federal reserve banks should be of 
 short and well-distributed maturities, but, in addition, should be 
 of such character that it is reasonably certain that they can be 
 collected when they mature. They ought to be essentially 'self- 
 liquidating,' or, in other words, should represent in every case 
 some distinct step or stage in the productive or distributive process 
 — the progression of goods from producer to consumer. The 
 more nearly these steps approach the final consumer, the smaller 
 will be the amount nivolved in each transaction as represented by 
 the bill, and the more automatically self-liquidating will be its 
 character." 
 
 The last sentence is particularly significant as applying even 
 to the retail trade. Again, the Board points out its preference for 
 bills of exchange as against ordinary notes of hand. 
 
 "Double-name paper drawn on a purchaser against an actual 
 sale of goods affords, from an economic point of view, prima 
 facie evidence of the character of the transaction from which 
 it arose. Single-name notes, now so freely used in the United 
 States, may represent the same kind of transactions as those 
 bearing two names. Inasmuch, however, as the single-name paper 
 does not show on its face the character of the transaction out of 
 which it arose — an admitted weakness of this form of paper — it is 
 incumbent upon each Federal reserve bank to insist that the char- 
 acter of the business and tlie general status of the concern supply- 
 ing such paper should be carefully examined in order that the dis- 
 counting bank may be certain that no such single-name paper has 
 been issued for purposes excluded by the Act, such as investments 
 of a permanent or speculative nature. Only careful inquiry on 
 these points will render it safe and proper for a Federal reserve 
 bank to consider such paper a 'self-liquidating' investment at 
 maturity." 
 
 Scope of Acceptances Extended 
 
 Thus, the Board clearly places a premium on bills of exchange, 
 and indicates their great desirability. 
 
 The Federal Reserve Board, under date of April 2, 1915 (Cir- 
 cular No. 11), went still further and said, in part: 
 
 "It is believed that it would unduly restrict the development 
 of the acceptance business to keep it altogether confined within 
 
 — 53 — 
 
the provisions of Section 13, which requires that acceptances, in 
 order to be eligible for rediscount at a Federal reserve bank, must 
 bear the indorsement of a member bank; particularly in view of 
 the further fact that the law limits the amount of acceptances which 
 may be taken with the indorsement of a member bank to 50 per 
 centum of its paid-in capital and surplus. Having found it neces- 
 sary to extend the scope of dealings in acceptances beyond these 
 limits, the Board has exercised the authority conferred upon it by 
 Section 14, and has formulated regulations covering the purchase 
 of acceptances without invariably requiring the indorsement of a 
 member bank. 
 
 "The acceptance is the standard form of paper in the world 
 discount market, and both on this account and because of its 
 acknowledged liquidity universally commands a preferential rate. 
 By reason of its being readily marketable, it is widely regarded as 
 a most desirable paper in the secondary reserves of banks and will 
 help to provide an effective substitute for the 'call loan.' Its growth, 
 however, will depend upon the ability of the American market to 
 adjust its rates effectively to those prevailing in other markets 
 for paper of this class. 
 
 "Recognizing these facts, the Federal Reserve Board has 
 determined to allow the Federal reserve banks latitude in fixing 
 rates for acceptances : Federal reserve banks may, from time to 
 time, submit for the approval of the Board maximum and mini- 
 mum rates within which they desire to be authorized to deal in 
 acceptances; within such limits and subject to such modifications as 
 may be imposed by the Board, Federal reserve banks will be allowed 
 to establish the rates at which they will deal in acceptances. 
 
 "The Board believes it to be in accordance with the spirit 
 of the Act to accord preferential treatment to acceptances bearing 
 the indorsement of member banks, offered for rediscount under 
 Section 13 — even to the point of allowing lower rates for such 
 acceptances, inasmuch as under the terms of this section, such 
 acceptances are available as collateral against the issue of Federal 
 reserve notes; and the Board will sanction a slight preferential 
 in favor of acceptances bearing the indorsement of member banks. 
 
 "When acceptances bearing the indorsement of member banks 
 are not obtainable in adequate amount or upon satisfactory terms. 
 Federal reserve banks desiring to purchase acceptances should 
 restrict themselves as far as posisble to such acceptances as bear 
 some other responsible signature (other than that of the drawer 
 and acceptor) and preferably that of a bank or banker." 
 
 54- 
 
Regulations on Bankers' Acceptances 
 
 Regulation J, Series of 1915 
 
 bankers' acceptances 
 
 [Superseding Regulation D of 1915] 
 
 The early regulations of the Federal Reserve Board on bankers' 
 acceptances follow: 
 
 "In this regulation, the term 'acceptance' is defined as a draft 
 or bill of exchange drawn to order, having a definite maturity 
 and payable in dollars in the United States, the obligation to pay 
 which has been accepted by an acknowledgment written or stamped 
 and signed across the face of the instrument by the party on whom 
 it is drawn; such agreement to be to the effect that the acceptor 
 will pay at maturity according to the tenor of such draft or bill 
 without qualifying conditions. 
 
 "The Federal Reserve Board has determined that, until further 
 order, to be eligible for discount under Section 13 by Federal re- 
 serve banks at rates to be established for bankers' acceptances : 
 
 "Acceptances must have been made by a member bank, non- 
 member bank, trust company, or by some private banking firm, 
 person, company or corporation engaged in the business of accept- 
 ing or discounting. Such acceptances will hereafter be referred to 
 as 'bankers' acceptances'; 
 
 "A banker's acceptance must be drawn by a commercial, in- 
 dustrial or agricultural concern (that is, some person, firm, com- 
 pany or corporation) directly connected with the importation 
 exportation of the goods involved in the transaction in which 
 acceptance originated, or by a 'banker.' In the latter case 
 goods, the importation or exportation of which is to be financed 
 by the acceptance, must be clearly specified in the agreement with or 
 the letter of advice to the acceptor. The bill must not be drawn or 
 renewed after the goods have been surrendered to the purchaser 
 or consignee. 
 
 "A banker's acceptance must bear on its face, or be accom- 
 panied by, evidence in the form satisfactory to a Federal re-y^ 
 serve bank that it originated in actual bona fide sale or consign- 
 ment involving the importation or exportation of goods. /Such evi- 
 dence may consist of a certificate on or accompanying the accept- 
 ance to the following effect : 
 
 'This acceptance is based upon a transaction involving the 
 importation or exportation of goods. Reference No. — . Name 
 of Acceptor .' 
 
 — 55 — 
 
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 com- 
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ng 
 
 aty 
 
 "Bankers' acceptances, other than those of member banks, 
 shall be eligible only after the acceptors shall have agreed in 
 writing to furnish to the Federal reserve banks of the respective 
 districts, upon request, information concerning the nature of the 
 transactions against vi'hich acceptances have been made. 
 
 "A bill of exchange accepted by a 'banker' may be considered 
 as drawn in good faith against 'actually existing values,' when it is 
 secured by a lien on or by transfer of title to the goods to be 
 transported; or in case of release of the goods before payment 
 of the acceptance by the substitution of other adequate security. 
 
 "Except in so far as they may be secured by a lien on or by 
 transfer of the title to the goods to be transported, the bills of 
 any person, firm, company, or corporation, drawn on and accepted 
 by any private banking firm, person, or corporation (other than 
 a bank or trust company) engaged in the business of discounting 
 or accepting, and discounted by a Federal reserve bank, shall 
 no time exceed in the aggregate a sum equal to five per centum 
 the paid-in capital of such Federal reserve bank. 
 
 "The aggregate of acceptances of any private banking firm, 
 person, company, or corporation (other than a bank or trust com- 
 pany) engaged in the business of discounting or accepting, dis- 
 counted or purchased by a Federal reserve bank, shall at no time)/ 
 exceed a sum equal to twenty-five per centum of the paid-in capital \ 
 of such Federal reserve bank. . . 
 
 "While it would appear impracticable to fix a maximum sum 
 or percentage up to which Federal reserve banks may invest 
 in bankers' acceptances, both under Section 13 and Section 14, it 
 will be necessary to watch carefully the aggregate amount to be 
 held from time to time. In framing their policy with respect to 
 transactions in acceptances. Federal reserve banks will have to 
 consider, not only the local demands to be expected from their 
 own members, but also requirements to be met in other districts. 
 The plan to be followed must in each case adapt itself to the con- 
 stantly varying needs of the country. . . ." 
 
 Final Definition of Trade Acceptance 
 
 Regulation P, Series of 1915 
 
 BILLS OF EXCHANGE DRAWN AGAINST SALES OF GOODS AND ACCEPTED BY PURCHASERS, 
 HEREINAFTER REFERRED TO AS "TRADE ACCEPTANCES" 
 
 When the Federal Reserve Board, on July 15th, promulgated 
 Circular No. 16 (Regulation P), Series of 1915, it became evident 
 
 — 56 — 
 
that the regulation issued in November, 1914, previously referred 
 to, was really to prepare the way for the final definition of "Trade 
 Acceptances." Other rulings also pointed out that eventually 
 double-name paper would be shown preference. This was finally 
 demonstrated when the Board approved a rate for trade accept- 
 ances of one-half of one per cent, below the regular discount rate. 
 The significance of this material variation in the rate is apparent, 
 as it was originally proposed to fix "a slightly lower rate" for two- 
 name paper than for single-name notes. 
 
 Regulation P, of July 15, 1915, is as follows: 
 
 "In this regulation, the term 'trade acceptance' is defined as 
 a bill of exchange of the character hereinafter described, drawn 
 to order, having a definite maturity and payable in dollars in the 
 United States, the obligation to pay which has been accepted by 
 an acknowledgment, written or stamped, and signed, across the face 
 of the instrument, by the company, firm, corporation, or person upon 
 whom it is drawn; such agreement to be to the efifect that the 
 acceptor will pay at maturity, according to its tenor, such draft or 
 bill without qualifying conditions. 
 
 "A trade acceptance to be eligible for rediscount, under Section 
 13, with a Federal reserve bank at the rate to be established for 
 trade acceptances : 
 
 (a) Must be indorsed by a member bank, accompanied by 
 waiver of demand notice and protest. 
 
 (b) Must have a maturity at the time of discount of not more 
 than 90 days. 
 
 (c) Must be accepted by the purchaser of goods sold to him 
 by the drawer of the bill and the bill must have been drawn against 
 indebtedness expressly incurred by the acceptor in the purchase 
 of such goods. 
 
 "A trade acceptance must bear on its face, or be accompanied 
 by, evidence in form satisfactory to the Federal reserve bank that 
 it was drawn by the seller of the goods on the purchaser of such 
 goods. Such evidence may consist of a certificate on or accom- 
 panying the acceptance, to the following effect: 'The obligation of 
 the acceptor of this bill arises out of the purchase of goods from 
 the drawer.' Such certificate may be accepted by the Federal re- 
 serve bank as sufficient evidence; provided, however, that the Fed- 
 eral reserve bank, in its discretion, may inquire into the exact nature 
 of the transaction underlying the acceptance." 
 
 — 57 — 
 
Open-Market Purchase of Bankers' Acceptances 
 
 Regulation S, Series of 1915 
 [Superseding Regulation R of 1915] 
 
 In Regulation R, Series of 1915, relating to the discount of 
 bankers' acceptances, the Federal Reserve Board provided for the 
 purchase in the open market of bankers' acceptances based on the 
 importation or exportation of goods. The Board further stated 
 that it had not felt justified, when admitting State banks and trust 
 companies into the Federal Reserve System, in stipulating that 
 such domestic acceptances should not be continued under reason- 
 able limitations as a part of their business. 
 
 Inasmuch as the making of these acceptances has been recog- 
 nized by the Board as the exercise of a legitimate banking func- 
 tion when authorized by law, it is thought that they are of the 
 character to make desirable investments for Federal reserve banks. 
 The Board therefore issued a new regulation (Regulation S, Series 
 of 1915), not only embodying the authority given in Regulation 
 R, Series of 1915, to purchase bankers' acceptances based on the 
 importation or exportation of goods, but also authorizing the pur- 
 chase of bankers' domestic acceptances within the limits prescribed 
 in the regulation, which provides : 
 
 "The Federal Reserve Board has determined that, until fur- 
 ther notice, to be eligible for purchase under Section 14 at the 
 rates to be established for the purchase of bankers' domestic and 
 foreign acceptances : 
 
 "(a) Acceptances must have been made by a bank or trust 
 company, or by some firm, person, company, or corporation en- 
 gaged in the business of accepting or discounting. Such accept- 
 ances will hereafter be referred to as 'bankers' acceptances'; 
 
 "(b) A banker's foreign acceptance must be drawn by a pur- 
 chaser or seller or other person, firm, company, or corporation 
 directly connected with the importation or exportation of the goods 
 involved in the transaction in which the acceptance originated, or 
 by a 'banker.' The bill must not be renewed after the goods have 
 been surrendered to the purchaser or consignee, except for such 
 reasonable period as may have been agreed upon at the time of 
 the opening of the credit as a condition incidental to the importa- 
 tion or exportation involved, provided that the bill must not con- 
 tain or be subject to any condition whereby the holder thereof is 
 obligated to renew the same at maturity; 
 
 — 58 — 
 
"(c) A banker's foreign acceptance must bear on its face, or 
 be accompanied by, evidence in form satisfactory to a Federal 
 reserve bank that it originated in, or is based upon, a transaction 
 or transactions involving the importation or exportation of goods. 
 Such evidence may consist of a certificate on or accompanying the 
 acceptance to the following effect : 'This acceptance is based upon a 
 transaction involving the importation or exportation of goods. 
 Reference No. — . Name of Acceptor ; 
 
 "(d) A banker's domestic acceptance must be based on a trans- 
 action covering the shipment of goods, such transactions to be evi- 
 denced at the time of acceptance by accompanying shipping 
 documents, or must be secured by a warehouse receipt covering 
 readily-marketable staples and issued by a warehouse independent 
 of the borrower; or by the pledge of goods actually sold; 
 
 "(e) A banker's domestic acceptance must bear on its face, or 
 be accompanied by, evidence in form satisfactory to the Federal 
 reserve bank that it is based on a transaction or is secured by a 
 receipt or pledge of the character defined in (d) hereof. Such 
 evidence may consist of a certificate in general form similar to that 
 suggested in (c) hereof; 
 
 "(f) Bankers' acceptances, other than those of member banks, 
 whether foreign or domestic, shall be eligible only after the accept- 
 ors shall have agreed in writing to furnish to the Federal reserve 
 banks of their respective districts, upon request, information con- 
 cerning the nature of the transactions against which acceptances 
 (certified or bearing evidence under (c) and (e) hereof) have been 
 made; 
 
 "(g) The aggregate of bills, domestic and foreign, of any 
 one drawer, drawn on and accepted by any bank or trust com- 
 pany and purchased or discounted by a Federal reserve bank, shall 
 at no time exceed 10 per cent, of the unimpaired capital and surplus 
 of such bank or trust company, but this restriction shall not apply 
 to the purchase or discount of bills drawn in good faith against 
 actually existing values ; that is, bills the acceptor of which is 
 secured by a lien on or by a transfer of title to the goods to be 
 transported, or by other adequate security, such as a warehouse 
 receipt, or the pledge of goods actually sold ; 
 
 "(h) The aggregate of bills, domestic and foreign, of any 
 one drawer, drawn on and accepted by any firm, person, company, 
 or corporation (other than a bank or trust company) engaged in 
 the business of discounting or accepting, and purchased or dis- 
 counted by a Federal reserve bank, shall at no time exceed a sum 
 equal to a definite percentage of the paid-in capital of such Federal 
 reserve bank, such percentage to be fixed from time to time by 
 the Federal Reserve Board ; but this restriction shall not apply to 
 the purchase or discount of bills drawn in good faith against actually 
 
 — 59 — 
 
existing values; that is, bills the acceptor of which is secured by 
 a lien on or by a transfer of title to the goods to be transported or 
 by other adequate security, such as a warehouse receipt, or the 
 pledge of goods actually sold; 
 
 "(i) The aggregate of bankers' acceptances, domestic and for- 
 eign, made by any one firm, person, company, or corporation (other 
 than a bank or trust company) engaged in the business of dis- 
 counting or accepting, purchased or discounted by a Federal re- 
 serve bank, shall at no time exceed a sum equal to a definite per- 
 centage of the paid-in capital of such Federal reserve bank; such 
 percentage to be fixed from time to time by the Federal Reserve 
 Board. 
 
 "No Federal reserve bank shall purchase a domestic or foreign 
 acceptance of a 'banker' other than a member bank which does not 
 bear the indorsement of a member bank, unless there is furnished 
 a satisfactory statement of the financial condition of the acceptor 
 in form to be approved by the Federal Reserve Board. 
 
 "Federal reserve banks should bear in mind that preference 
 should be given wherever possible to acceptances indorsed by a 
 member bank, discounted under Section 13, not only because of the 
 additional protection that such indorsement affords, but also be- 
 cause of the reason that acceptances discounted under Section 13 
 may be used as collateral security for the issue of Federal reserve 
 notes." 
 
 Preferential Rate on Acceptances 
 
 From the foregoing, it will be noted that the desire of the 
 Federal Reserve Board is to establish a class of paper which will, 
 as surely as possible, bear on its face the fact that it is used in 
 connection with a genuine commercial transaction ; that the pro- 
 ceeds are to be used in the producing, carrying or marketing of 
 goods, in one or more steps of production and distribution, and 
 feeling that the trade acceptance or domestic bill of exchange is 
 most easily identified on its face with such a transaction, permits 
 a preference thereon by a slightly lower rate when a reserve bank 
 rediscounts or purchases same in the open market. 
 
 This does not mean that any doubt should be cast upon 
 single-name paper, which heretofore has occupied the discount 
 market. It, too, is eligible for rediscount by the Federal reserve 
 banks if accompanied by satisfactory evidence that the proceeds 
 
 — 60 — 
 
were used, or were to be used, as specified, for strictly commercial 
 purposes. Single-name paper does not, of course, on its face, 
 move parallel to or along with commercial transactions as the 
 trade acceptance does, yet the vast bulk of single-name paper has 
 always fallen under the definition of that class of paper eligible 
 under the Federal Reserve Act and rulings established by the 
 Federal Reserve Board. 
 
 Checking Tendency Toward Over-Expansion 
 
 Each piece of paper, whether it be single or double-name, 
 must be examined to discover its peculiar merits. The mere fact 
 that the paper contains two names does not, of course, alone make 
 it preferable to a single-name note, but from the point of view of 
 the Federal Reserve Board, does have an advantage in its almost 
 self-evident relationship with that form of commercial transaction 
 defined in the Act. 
 
 It is also quite apparent that the Federal Reserve Board will 
 not countenance any laxity on the part of the Federal reserve 
 banks in rediscounting or buying acceptances in the open market. 
 Proper evidence of the responsibility of the acceptor will always 
 be necessary when the paper is bought in the open market, and 
 if discounted in behalf of a member bank, will be subjected to the 
 same sort of examination as single-name paper. This, in itself, is 
 likely to prove an effective check on any efforts toward over- 
 expansion on the part of the drawers of acceptances or notes. It 
 is a matter of credit in each case. 
 
 Cable Transfers and Bills of Exchange 
 
 Regulation T, Series of 1915 
 
 GENERAL OPEN-MARKET OPERATIONS 
 
 The purchase and sale of cable transfers and bills of exchange, 
 both domestic and foreign, of the kinds and maturities made eligi- 
 ble for rediscount by the Federal Reserve Act, and of bankers' 
 acceptances payable in foreign countries and in foreign currencies, 
 are covered by Circular No. 20 and Regulation T, December 4, 
 
 — 61 — 
 
1915, in which the Board calls attention to the open-market sec- 
 tion of the Federal Reserve Act, and to the fact that it enables the 
 Federal reserve banks to exert a steadying- influence upon pre- 
 vailing rates of interest by the use of their purchasing power when- 
 ever conditions make such influence desirable, and when, owing 
 to the lack of applications for rediscounts, they are unable to in- 
 fluence rates through the latter means. The Board states, how- 
 ever, that it does not wish to be understood as encouraging ex- 
 pansion of credits at times and under conditions when there should 
 be contraction, but rather as holding the view that the Federal 
 reserve banks, taking cognizance of the conditions in their respec- 
 tive districts, should avail themselves of the powers granted by 
 the Act, just as they have done in connection with other open- 
 market powers conferred upon them. 
 
 The Board defines "open-market operations" as all those 
 transactions authorized by Section 14 of the Federal Reserve Act 
 which involve dealings with persons or institutions — whether or 
 not members of the Federal Reserve System — and which do not 
 require the indorsement of a member bank. The regulation makes 
 the provision: 
 
 "In order to carry on open-market transactions in cable 
 transfers and foreign bills of exchange (including foreign bankers' 
 acceptances) ; that is, payments to be made in, or bills payable in 
 foreign countries, it will be necessary for Federal reserve banks to 
 open accounts or establish agencies in foreign countries. Such bills 
 of exchange and foreign acceptances must comply with the applicable 
 requirements of Sections 13 and 14. As the law prescribes that 
 these connections are to be established only with the consent of the 
 Federal Reserve Board, Federal reserve banks will be required to 
 communicate with the Federal Reserve Board whenever they are 
 ready to enter these foreign fields. 
 
 "The Federal Reserve Board realizes that in dealing in foreign 
 exchange the Federal reserve banks must necessarily have wide dis- 
 cretion in determining the rates at which they will buy or sell. 
 It is not necessary that the bills shall have been actually accepted 
 at the time of purchase. The Federal Reserve Board, however, 
 will require that unaccepted 'long bills' payable in foreign countries, 
 when purchased, unless secured by documents, shall bear one satis- 
 factory indorsement other than those of the drawer or acceptor, 
 preferably that of a banker. Federal reserve banks should exercise 
 due caution in dealing in foreign bills, and boards of directors 
 should fix a limit within which the acceptances or bills of a single 
 firm may be taken. 
 
 — 62 — 
 
"A bill of exchange may be defined as an unconditional order 
 in writing, addressed by one person to another, signed by the 
 person giving it, requiring the person to whom it is addressed to 
 pay on demand, or at a fixed or determinable future time, a certain 
 sum of money to, or to the order of, a specified person, or to 
 bearer. 
 
 "A domestic bill of exchange is payable in dollars in the United 
 States. 
 
 "The Federal Reserve Board has determined that a bill, in 
 order to be eligible for purchase under Section 14 by a Federal 
 reserve bank, at the rate to be established for open-market 
 operations : 
 
 "(a) Must be a bill, the proceeds of which have been used, 
 or are to be used, in producing, purchasing, carrying, or marketing 
 goods in one or more steps of production, manufacture and dis- 
 tribution; but shall not be eligible if its proceeds have been used, 
 or are to be used, for a permanent or fixed investment of any kind ; 
 for example, land, buildings, machinery, etc., or for any investment 
 of a merely speculative character; 
 
 "(b) Must have been drawn by a domestic or foreign firm, 
 company, corporation, or individual in the United States; but need 
 not bear the indorsement of a member bank; 
 
 "(c) Must have been accepted by the drawee prior to the 
 purchase by a Federal reserve bank, unless accompanied and secured 
 by approved warehouse receipts, bills of lading, or other such docu- 
 ments covering readily-marketable goods. 
 
 "Before purchasing domestic bills of exchange (a) the Federal 
 reserve bank must secure statements concerning the condition 
 and standing of the drawer of the paper, and, if possible, also of 
 the acceptor of the bill, sufficient to satisfy the bank as to the 
 nature and quality of the paper to be purchased. 
 
 "(b) No Federal reserve bank will be permitted to purchase 
 bills of any one drawer, or issued upon one maker to an amount 
 to exceed in the aggregate a percentage of its capital, to be fixed 
 from time to time by the Federal Reserve Board, except when 
 secured by approved warehouse receipts, bills of lading, or other 
 such documents covering readily-marketable goods. The aggregate 
 amount drawn on any one acceptor, purchased by Federal reserve 
 banks, shall not exceed a reasonable percentage of the stated net 
 worth of the parties whose names appear upon the paper. 
 
 "Federal reserve banks desiring to engage in open-market trans- 
 actions in domestic bills of exchange are required to communicate 
 to the Federal Reserve Board the rate they desire to establish, 
 for review and determination." 
 
 — 63 — 
 
Regulation B, Series of 1916 (in which no change appears in 
 Regulation B of 1917), supersedes the foregoing and makes more 
 explicit the definitions and rules for the open-market purchase of 
 bills of exchange, trade acceptances, and bankers' acceptances 
 under Section 14 of the Federal Reserve Act, as follows : 
 
 Character of Bills and Acceptances Eligible 
 
 Regulation B, Series of 1916 
 
 OPEN-MARKET PURCHASES OF BILLS OF EXCHANGE, TRADE ACCEPTANCES, AND 
 bankers' ACCEPTANCES UNDER SECTION 14 
 
 [Superseding Regulations S and T of 1915] 
 
 "The Federal Reserve Board, exercising its statutory right 
 to regulate the purchase of bills of exchange and acceptances, has 
 determined that a bill of exchange or acceptance, to be eligible 
 for purchase by Federal reserve banks under Section 14 — 
 
 "(a) Must not have been issued for carrying or trading ih 
 stocks, bonds, or other investment securities, except bonds and 
 notes of the Government of the United States; 
 
 "(b) Must not be a bill the proceeds of v^rhich have been used 
 or are to be used for permanent or fixed investments of any kind, 
 such as land, buildings, or machinery, or for investments of a 
 merely speculative character; 
 
 "(c) Must have been accepted by the drawee prior to pur- 
 chase by a Federal reserve bank, unless it is accompanied and 
 secured by shipping documents or by a warehouse, terminal, or other 
 similar receipt conveying security title; 
 
 "(d) May be secured by the pledge of goods* or collateral, 
 provided it is otherwise eligible." 
 
 Bills of Exchange and Trade Acceptances 
 
 Regulation B, Series of 1916 
 
 OPEN-MARKET PURCHASES OF BILLS OF EXCHANGE, TRADE ACCEPTANCES, AND 
 bankers' ACCEPTANCES UNDER SECTION 14 
 
 [Superseding Regulations S and T of 1915] 
 
 "(a) DEFINITION.— 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 ad- 
 
 • When used in this regulation, the word "goods" shall be construed 
 to include goods, wares, merchandise, or agricultural products. Including 
 liva stock. 
 
 — 64 — 
 
dressed, to pay, in the United States, at a fixed or 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 goods sold, and accepted 
 by such purchaser. 
 
 "(b) ELIGIBILITY.— To be eligible for purchase, the bill 
 must have arisen out of an actual commercial transaction, domestic 
 or foreign; that is, it must be a bill which has been issued or 
 drawn for agricultural, industrial, or commercial purposes or the 
 proceeds of which have been used or are to be used for the purpose 
 of producing, purchasing, carrying or marketing goods in one or 
 more of the steps of the process of production, manufacture, or 
 distribution. It must have a maturity at time of purchase of not 
 more than ninety days, exclusive of days of grace. 
 
 "(c) EVIDENCE OF ELIGIBILITY.— A Federal reserve 
 bank shall take such steps as it deems necessary to satisfy itself 
 as to the eligibility of the bill offered for purchase, unless it 
 presents prima facie evidence thereof or bears a stamp or certificate 
 affixed by the acceptor or drawer showing that it is a trade 
 acceptance. 
 
 "(d) STATEMENTS.— Unless indorsed by a member bank, 
 a bill is not eligible for purchase until a satisfactory statement has 
 been furnished of the financial condition of one or more of the 
 parties thereto." 
 
 Bankers* Acceptances 
 
 Regulation B, Series of 1916 
 
 OPF.N-MARKET PURCHASES OF BILLS OF EXCHANGE, TRADE ACCEPTANCES, AND 
 bankers' ACCEPTANCES UNDER SECTION 14 
 
 [Superseding Regulations S and T of 1915] 
 
 "(a) DEFINITION.— A banker's acceptance, within the mean- 
 ing of this regulation, is a bill of exchange of which the acceptor 
 is a bank or trust company, or a firm, person, company, or corpora- 
 tion engaged in the business of granting bankers' acceptance credits. 
 "(b) EUGIBILITY.— To be eligible for purchase, the bill, 
 which must have a maturity at time of purchase O'f not more than 
 three months, exclusive of days of grace, must have been drawn 
 under a credit opened for the purpose of conducting, or settling 
 accounts resulting from a transaction or transactions involving — 
 "(1) The shipment of goods between the United States and 
 any foreign country, or between the United States and 
 any of its dependencies or insular possessions, or between 
 foreign countries, or 
 
 — 65 — 
 
"(2) The shipment of goods within the United States, provided 
 the bill at the time of its acceptance is accompanied by 
 shipping documents, or 
 
 "(3) The storage within the United States of readily-market- 
 able goods, provided the acceptor of the bill is secured 
 by a warehouse, terminal, or other similar receipt, or 
 
 "(4) The storage within the United States of goods which 
 have been actually sold, provided the acceptor of the bill is 
 secured by the pledge of such goods; 
 
 or it must be a bill drawn by a bank or banker in a foreigfn 
 country or dependency or insular possession of the United States 
 for the purpose of furnishing dollar exchange. In this latter case, 
 the baiik or banker drawing the bill must be in a country, depend- 
 ency, or possession whose usages of trade have been determined 
 by the Federal Reserve Board to require the drawing of bills of 
 this character. 
 
 "(c) EVIDENCE OF ELIGIBILITY.— A Federal reserve 
 bank must be satisfied either by reference to the acceptance itself, 
 or otherwise, that it is eligible for purchase. Satisfactory evidence 
 of eligibility may consist of a stamp or certificate affixed by the 
 acceptor, in form satisfactory to the Federal reserve bank. No 
 evidence of eligibility is required with respect to a bill accepted 
 by a national bank. 
 
 "(d) STATEMENTS.— Bankers' acceptances, other than those 
 accepted or indorsed by member banks, shall be eligible for pur- 
 chase only after the acceptor has furnished a satisfactory statement 
 of financial condition in form to be approved by the Federal Re- 
 serve Board and has agreed in writing with a Federal reserve 
 bank to inform it upon request concerning the transactions under- 
 lying such acceptances." 
 
 The foregoing regulations for the open-market purchase ot 
 bills of exchange, trade acceptances, and bankers' acceptances under 
 Section 14 are, in turn, superseded by Regulation B, Series of 1920, 
 as follows: 
 
 Kinds of Bills and Acceptances Specified 
 
 Regulation B, Series of 1920 
 
 open-market purchases of bills of exchange, trade .acceptances, 
 bankers' acceptances under section 14 
 
 [Superseding Regulation B of 1917] 
 
 "The Federal Reserve Board, exercising its statutory right 
 to regulate the purchase of bills of exchange and acceptances, 
 
 — 66 — 
 
has determined that a bill of exchange or acceptance to be 
 eligible for purchase by Federal reserve banks under Section 14: 
 
 "(a) I^rust conform to the relative requirements of Regula- 
 tion A, except that a banker's acceptance growing out of a 
 transaction involving the storage within the United States of 
 goods which have been actually sold, may be purchased, provided 
 that the acceptor is secured by the pledge of such goods and, 
 provided further, that the bill conforms in other respects to the 
 relative requirements of Regulation A (see page 69) ; 
 
 "(b) Must have a maturity at the time of purchase of not 
 more than 90 days, exclusive of days of grace, unless it is a bill 
 drawn on a banker, when it may have a maturity of three 
 months, exclusive of days of grace; 
 
 "(c) Must have been accepted by the drawee prior to pur- 
 chase by a Federal reserve bank, unless it is either accompanied 
 and secured by shipping documents or by a warehouse, terminal, 
 or other similar receipt conveying security title, or bears a satisfac- 
 tory banking indorsement. 
 
 "A bill of exchange, unless indorsed by a member bank, is 
 not eligible for purchase until a satisfactory statement has been 
 furnished of the financial condition of one or more of the parties 
 thereto. 
 
 "A banker's acceptance, unless accepted or indorsed by a 
 member bank, is not eligible for purchase until the acceptor has 
 furnished a satisfactory statement of its financial condition in 
 form to be approved by the Federal reserve bank, and has agreed 
 in writing with a Federal reserve bank to inform it upon request 
 concerning the transaction underlying the acceptance." 
 
 Maturity of Bankers' Acceptances Extended 
 
 The Federal Reserve Board, under date of May 6, 1921, issued 
 a new Regulation B, Series of 1921, relating to open-market pur- 
 chases of bills of exchange, trade acceptances and bankers' accept- 
 ances under Section 14 of the Federal Reserve Act. The new regula- 
 tion, which supersedes Regulation B, Series of 1920, given above, 
 was issued primarily for the purpose of permitting Federal reserve 
 banks, until further notice, to make open-market purchases of 
 bankers' acceptances having maturities not exceeding six months, 
 which arise out of transactions involving the importation or exporta- 
 
 — 67 — 
 
tion of goods. Up to the time that this new regulation became effective, 
 three months was the maximum maturity of acceptances ehgible for 
 purcliase by Federal reserve banks. 
 
 In issuing the new regulation, the Federal Reserve Board stated 
 that two considerations had prompted it to take such action : ( 1 ) The 
 desire to broaden the acceptance market by meeting the wants of savings 
 banks and other purchasers of bankers' acceptances who have been 
 deterred from investing in acceptances of more than three months' 
 maturity, because of the lack of authority of Federal reserve banks 
 to purchase longer maturities up to six months ; (2) to provide more 
 ample facilities for financing import and export trade with countries 
 where either normal conditions or present abnormal conditions indicate 
 the desirability of rendering assistance by making acceptances of 
 maturities not exceeding six months eligible for purchase by Federal 
 reserve banks. The Federal Reserve Board points out that vigilant 
 care should be exercised by Federal reserve banks in purchasing 
 acceptances of long maturities, in order that liquidity of the aggre- 
 gate investment in acceptances held by them should not be affected. 
 
 A further slight amendment to Regulation B provides for the 
 open-market purchase of bankers' acceptances growing out of the 
 domestic storage of goods other than readily-marketable staples. 
 
 Regulation B, as amended, is as follows : 
 
 Character of Bills and Acceptances Eligible 
 
 Regulation B, Series of 1921 
 
 OPEN-MARKET PURCHASES OF BILLS OF EXCHANGE, TRADE ACCEPTANCES, AND 
 bankers' ACCEPTANCES UNDER SECTION 14 
 
 [Superseding Regulation B of 1920] 
 "The Federal Reserve Board, exercising its statutory right to 
 regulate the purchase of bills of exchange and acceptances, has 
 determined that a bill of exchange or acceptance, to be eligible for 
 purchase by Federal reserve banks under this provision of Section 
 14, must have been accepted by the drawee prior to such purchase, 
 unless it is either accompanied or secured by shipping documents 
 or by warehouse, terminal, or other similar receipt conveying secur- 
 
 — 68 — 
 
j'ty title, or bears a satisfactory banking indorsement, and must con- 
 form to the relative requirements of Regulation A (see page 71 of 
 booklet), except that 
 
 "(a) A bankers' acceptance growing out of a transaction 
 involving the importation or exportation of goods may be purchased 
 if it has a maturity not in excess of six months, exclusive of days 
 of grace, provided that it conforms in other respects to the relative 
 requirements of Regulation A, and 
 
 "(b) A bankers' acceptance growing out of a transaction 
 involving the storage within the United States of goods actually 
 under contract for sale and not yet delivered or paid for may be 
 purchased, provided that the acceptor is secured by the pledge of 
 such goods; and provided further that the acceptance conforms in 
 other respects to the relative requirements of Regulation A. 
 
 "A bill of exchange, unless indorsed by a member bank, is not 
 eligible for purchase until a satisfactory statement has been 
 furnished of the financial condition of one or more of the parties 
 thereto. 
 
 "A bankers' acceptance, unless accepted or indorsed by a mem- 
 ber bank, is not eligible for purchase until the acceptor has furnished 
 a satisfactory statement of its financial condition in form to be 
 approved by the Federal reserve bank and has agreed in writing 
 with a Federal reserve bank to inform it upon request concerning 
 the transaction underlying the acceptance." 
 
 Statutory Provisions Governing Rediscounts 
 
 Regulation A, referred to in Regulation B, Series of 1921. given 
 above, defines the general character of the notes, drafts, and bills 
 of exchange eligible for rediscount under Section 13 of the Federal 
 Reserve Act, and specifies the rules and conditions governing such 
 operations. 
 
 The general statutory provisions covering rediscounts under 
 Section 13 stipulate that a note, draft, or bill of exchange shall 
 have a maturity at the time of discount of not more than 90 days, 
 exclusive of days of grace. If drawn or issued for agricultural 
 purposes or based on live stock, however, it may have a maturity 
 of not more than six months, exclusive of days of grace. The note, 
 
 — 69 — 
 
draft, or bill must be indorsed by a member bank, and must arise 
 out of an actual commercial transaction. It must not be issued for 
 carrying or trading in stocks or other investment securities, except 
 bonds and notes of the Government of the United States. 
 
 The aggregate of notes, drafts, and bills bearing the signature 
 or indorsement of any one borrower rediscounted for any one mem- 
 ber bank, whether State or national, shall at no time exceed 10 
 per cent, of the unimpaired capital and surplus of such bank; but 
 this restriction shall not apply to the discount of bills of exchange 
 drawn in good faith against actually existing values. As previously 
 shown, the amendment to the Federal Reserve Act of March 3, 
 1919, authorized the Federal Reserve Board to permit Federal re- 
 serve banks, until December 31, 1920, to rediscount for any member 
 bank paper bearing the signature or indorsement of any one bor- 
 rower in an amount not to exceed 20 per cent, of the member 
 bank's capital and surplus, provided that the excess over and above 
 10 per cent, was secured by not less than a like face amount of 
 bonds or notes of the United States issued since April 24, 1917, 
 or certificates of indebtedness of the United States. 
 
 No Federal reserve bank may discount for any member State 
 bank or trust company any of the notes, drafts, or bills of any one 
 borrower who is liable for borrowed money to such State bank 
 or trust company in an amount greater than 10 per cent, of the 
 capital and surplus of that State bank or trust company; but in 
 determining the amount of money so borrowed, the discount of 
 bills of exchange drawn in good faith against actually existing 
 value, and the discount of commercial or business paper actually 
 owned by the person negotiating the same, shall not be included. 
 The amendment of March 3, 1919, also permitted Federal reserve 
 banks, with the consent of the Federal Reserve Board, to redis- 
 count for a member State bank or trust company, until December 
 31, 1920, paper of any one borrower secured by not less than a 
 like face amount of bonds or notes of the United States issued 
 since April 24, 1917, or certificates of indebtedness of the United 
 States, even though such State bank or trust company may already 
 have loaned to the borrower under his regular line of credit in 
 excess of the 10 per cent, limit defined above. If, however, the 
 member State bank or trust company had loaned to one borrower 
 in excess of the 10 per cent, limit under his regular line of credit, 
 the Federal reserve bank could not rediscount for that State bank 
 
 — 70 — 
 
or trust company any of the paper of that borrower taken under 
 that regular line of credit, but was permitted to rediscount any 
 paper so secured by government obligations of the kinds specified 
 up to an amount not in excess of 20 per cent, of the capital and 
 surplus of such State bank or trust company. 
 
 The new regulations governing rediscounts under Section 13 
 are as follows : 
 
 Notes, Drafts, and Bills of Exchange Eligible 
 
 Regulation A, Series of 1920 
 
 REDISCOUNTS UNDER SECTION 13 
 
 [Superseding Regulation A of 1917] 
 
 "The Federal Reserve Board, exercising its statutory right 
 to define the character of a note, draft, or bill of exchange 
 eligible for rediscount at a Federal reserve bank, has deter- 
 mined that: 
 
 "(a) It must be a note, draft, or bill of exchange which has 
 been issued or drawn, or the proceeds of which have been used 
 or are to be used in the first instance, in producing, purchasing, 
 carrying, or marketing goods* in one or more of the steps of the 
 process of production, manufacture, or distribution, or for the 
 purpose of carrying or trading in bonds or notes of the United 
 States ; 
 
 "(b) It must not be a note, draft, or bill of exchange the 
 proceeds of which have been used or are to be used for perma- 
 nent or fixed investments of any kind, such as land, buildings, 
 or machinery, or for any other capital purpose; 
 
 "(c) It must not be a note, draft, or bill of exchange the 
 proceeds of which have been used or are to be used for invest- 
 ments of a purely speculative character or for the purpose of 
 lending to some other borrower; 
 
 "(d) It may be secured by the pledge of goods or collateral 
 of any nature, including paper, which is ineligible for rediscount, 
 provided it (the note, draft, or bill of exchange) is otherwise 
 eligible." 
 
 Applications for Rediscount 
 
 Regulation A, Series of 1920 
 
 REDISCOUNTS UNDER SECTION 13 
 
 [Superseding Regulation A of 1917] 
 
 "All applications for the rediscount of notes, drafts, or bills 
 of exchange must contain a certificate of the member bank, in 
 
 • When used In this regulation, the word "goods" shall be construed 
 lo Include goods, wares, merchandise, or agricultural products. Including 
 
 — 71 — 
 
form to be prescribed by the Federal reserve bank, that, to the 
 best of its knowledge and belief, such notes, drafts, or bills of 
 exchange have been issued for one or more of the purposes 
 mentioned in (a), (see page 69), and, in the case of a member 
 State bank or trust company, all applications must contain a 
 certificate or guaranty to the eflfect that the borrower is not 
 liable, and will not be permitted to become liable during the 
 time his paper is held by the Federal reserve bank, to such bank 
 or trust company for borrowed money in an amount greater than 
 that specified in I abovef." 
 
 Promissory Notes 
 
 Regulation A, Series of 1920 
 
 REDISCOUNTS UNDER SECTION 13 
 
 [Superseding Regulation A of 1917] 
 
 "(a) DEFINITION.— A promissory note, within the 
 meaning of this regulation, is defined as an unconditional 
 promise, in writing, signed by the maker, to pay, in the United 
 States, at a fixed or determinable future time, a sum certain in 
 dollars to order or to bearer. 
 
 "(b) EVIDENCE OF ELIGIBILITY AND REQUIRE- 
 MENT OF STATEMENTS.— A Federal reserve bank must be 
 satisfied by reference to the note or otherwise that it is eligible 
 for rediscount. The member bank shall certify in its application 
 whether the note oflFered for rediscount has been discounted for a 
 depositor other than a bank or for a non-depositor and, if dis- 
 counted for a banl<, whether for a member or a non-member 
 bank. The member bank must also certify whether a financial 
 statement of the borrower is on file with it. 
 
 "A recent financial statement of the borrower must be on 
 file with the member bank in all cases, except with respect to 
 any note discounted by a member bank for a depositor other 
 
 than a bank or another member bank if 
 
 "(1) It is secured by a warehouse, terminal, or other 
 similar receipt covering goods in storage, or by bonds or 
 notes of the United States; or 
 
 "(2) The aggregate of obligations of the borrower 
 rediscounted and offered for rediscount at the Federal re- 
 serve bank by the member bank is less than a sum equal 
 to 10 per cent, of the paid-in capital of the member bank 
 and is less than $5,000. 
 "The Federal reserve bank shall use its discretion in taking 
 the steps necessary to satisfy itself as to eligibility. Compliance 
 
 t Refers to General Statutory Provisions of Section 13, previously 
 autnmarlzed. 
 
 — 72 — 
 
of a note with II (b) t may be evidenced by a statement of the 
 borrower showing a reasonable excess of quick assets over cur- 
 rent habilities. A Federal reserve bank may, in all cases, require 
 the financial statement of the borrower to be filed with it." 
 
 The general statutory provisions relating to rediscounts under 
 Section 13 specify that any Federal reserve bank may make ad- 
 vances to its member banks on their promissory notes for a period 
 not exceeding 15 days, provided that they are secured by notes, 
 drafts, bills of exchange, or bankers' acceptances which are eligible 
 for rediscount or for purchase by Federal reserve banks, or by the 
 deposit or pledge of bonds or notes of the United States, or bonds 
 of the War Finance Corporation. 
 
 Drafts, Bills of Exchange, and Trade Acceptances 
 
 Regulation A, Series of 1920 
 
 REDISCOUNTS UNDER SECTION 13 
 
 [Superseding Regulation A of 1917] 
 
 "(a) DEFINITION.— A draft or bill of exchange, within 
 the meaning of this regulation, is defined as an unconditional 
 order in writing, addressed by one person to another, signed by 
 the person giving it, requiring the person to whom it is addressed 
 to pay in the United States, at a fixed or determinable future 
 time, a sum certain in dollars to the order of a specified person; 
 and a trade acceptance is defined as a draft or bill of exchange, 
 drawn by the seller on the purchaser of goods sold,* and ac- 
 cepted by such purchaser. 
 
 "(b) EVIDENCE OF ELIGIBILITY AND REQUIRE- 
 MENT OF STATEMENTS.— A Federal reserve bank shall take 
 such steps as it deems necessary to satisfy itself as to the 
 eligibility of the draft, bill, or trade acceptance offered for re- 
 discount and may require a recent financial statement of one or 
 more parties to the instrument. The draft, bill, or trade accept- 
 ance should be drawn so as to evidence the character of the 
 underlying transaction, but if it is not so drawn evidence of 
 eligibility may consist of a stamp or certificate afifixed by the 
 acceptor or drawer in a form satisfactory to the Federal reserve 
 bank." 
 
 ' IRefers to general character of notes, drafts, and biUs of exchange 
 
 eligible It must not be a note, draft, or bill of exchange the proceeds 
 of which have been u.sed or are to be used for permanent or fixed 
 Investments of any kind, such as land, buildings, or machinery, or for 
 any other capital purpose. . , , , ^ ». v» 
 
 •A consignment of goods or a conditional sale of goods can not be 
 considered "goods sold" within the meaning of this clause. The pur- 
 chase price of goods plus the cost of labor in effecting their Installation 
 may be included in the amount for which the trade acceptance Is drawn. 
 
 -73- 
 
Six Months* Agricultural Paper 
 
 Regulation A, Series of 1920 
 
 REDISCOUNTS UNDER SECTION 13 
 
 [Superseding Regulation A of 1917] 
 
 "(a) DEFINITION.— Six months' agricultural paper, 
 within the meaning of this regulation, is defined as a note, 
 draft, bill of exchange, or trade acceptance drawn or issued for 
 agricultural purposes, or based on live stock; that is, a note, draft, 
 bill of exchange, or trade acceptance the proceeds of wliich have 
 been used, or are to be used, for agricultural purposes, including 
 the breeding, raising, fattening, or marketing of live stock, and 
 which has a maturity at the time of discount of not more than 
 six months, exclusive of days of grace. 
 
 "(b) ELIGIBILITY.— To be eligible for rediscount, six 
 months' agricultural paper, whether a note, draft, bill of ex- 
 change, or trade acceptance, must comply with the respective 
 sections of this regulation which would apply to it if its maturity 
 were 90 days or less." 
 
 Rediscount of Bankers* Acceptances 
 
 Regulation A, Series of 1920 
 
 REDISCOUNTS UNDER SECTION 13 
 
 [Superseding Regulation A of 1917] 
 
 "(a) DEFINITION. — A banker's acceptance within the 
 meaning of this regulation is defined as a draft or bill of ex- 
 change, whether payable in the United States or abroad and 
 whether payable in dollars or some other money, of which the 
 acceptor is a bank or trust company, or a firm, person, com- 
 pany, or corporation engaged generally in the business of grant- 
 ing bankers' acceptance credits. 
 
 "(b) ELIGIBILITY. — A Federal reserve bank may redis- 
 count any such bill having a maturity at time of discount of 
 not more than three months, exclusive of days of grace, which 
 has been drawn under a credit opened for the purpose of con- 
 ducting or settling accounts resulting from a transaction or 
 transactions involving any one of the following: 
 
 "(1) The shipment of goods between the LTnited 
 States and any foreign country, or between the United 
 States and any of its dependencies or insular possessions, 
 or between foreign countries. While it is not necessary 
 that shipping documents covering goods in the process of 
 shipment be attached to drafts drawn for the purpose of 
 financing the exportation or importation of goods, and 
 
 — 74 — 
 
while it is not essential, therefore, that each such draft 
 cover specific goods actually in existence at the time of 
 acceptance, nevertheless it is essential as a prerequisite to 
 eligibility either (a) that shipping documents or a docu- 
 mentary export draft be attached at the time the draft is 
 presented for acceptance, or (b) if the goods covered by 
 the credit have not been actually shipped, that there be in 
 existence a specific and bona fide contract providing for 
 the exportation or importation of such goods at or within 
 a specified and reasonable time and that the customer 
 agree that the accepting bank will be furnished in due 
 course with shipping documents covering such goods or 
 with exchange arising out of the transaction being 
 financed by the credit. A contract between principal and 
 agent will not be considered a bona fide contract of the 
 kind required above, nor is it enough that there be a con- 
 tract providing merely that the proceeds of the accept- 
 ance will be used only to finance the purchase or shipment 
 of goods to be exported or imported ; 
 
 "(2) The shipment of goods within the United 
 States, provided shipping documents conveying security 
 title are attached at the time of acceptance, or 
 
 "(3) The storage of readily-marketable staples,* pro- 
 vided that the bill is secured at the time of acceptance by 
 a warehouse, terminal or other similar receipt, conveying 
 security title to such staples, issued by a party independent 
 of the customer, and provided further that the acceptor 
 remains secured throughout the life of the acceptance. In 
 the event that the goods must be withdrawn from storage 
 prior to the maturity of the acceptance or the retirement 
 of the credit, a trust receipt or other similar document 
 covering the goods may be substituted in lieu of the 
 original document, provided that such substitution is con- 
 ditioned upon a reasonably prompt liquidation of the 
 credit. In order to insure compliance with this condition, 
 it should be required, when the original document is re- 
 leased, either (a) that the proceeds of the goods will be 
 applied within a specified time toward a liquidation of the 
 acceptance credit or (b) that a new document, similar to 
 the original one, will be resubstituted within a specified 
 time, 
 and a Federal reserve bank may also rediscount any bill drawn 
 
 • A readily-marketable staple within the meaning of these regula- 
 tions may be deHned as an article of commerce, agriculture, or industry 
 of such uses a» to make It the subject of constant dealings In ready 
 markets with such frequent quotations of price as to make (a) the price 
 easily and definitely aacertalnable and (b) the staple itself easy to 
 realize upon by Mile at any time. 
 
 — 75 — 
 
by a bank or banker in a foreign country or dependency or 
 insular possession of the United States for the purpose of fur- 
 nishing dollar exchange, as provided in Regulation C, provided 
 that it has a maturity at the time of discount of not more than 
 three months, exclusive of days of grace. 
 
 "(c) GENERAL CONDITIONS.— (1) Acceptances in excess 
 of 10 per cent. — In order to be eligible, acceptances for any one 
 customer in excess of 10 per cent, of the capital and surplus of 
 the accepting bank must remain actually secured throughout the 
 life of the acceptance. In the case of acceptances of member 
 banks, this security must consist of shipping documents, ware- 
 house receipts, or other such documents, or some other actual 
 security grov^ring out of the same transaction as the acceptance, 
 such as documentary drafts, trade acceptances, terminal receipts, 
 or trust receipts which cover goods of such a character as to 
 insure at all times a continuance of an effective and lawful lien 
 in favor of the accepting bank. Other trust receipts are not 
 secured within the meaning of this paragraph if they permit the 
 customer to have access to or control over the goods. 
 
 "(2) Maturity. — Ahhough a Federal reserve bank may legally 
 rediscount an acceptance having a maturity at the time of dis- 
 count of not more than three months, exclusive of days of grace, 
 it may decline to rediscount any acceptance the maturity of 
 which is in excess of the usual or customary period of credit 
 required to finance the underlying transaction or which is in 
 excess of that period reasonably necessary to finance such trans- 
 action. Since the purpose of permitting the acceptance of drafts 
 secured by warehouse receipts or other such documents is to 
 permit of the temporary holding of readily-marketable staples in 
 storage pending a reasonably prompt sale, shipment, or distribu- 
 tion, no such acceptance should have a maturity in excess of the 
 time ordinarily necessary to effect a reasonably prompt sale, 
 shipment, or distribution into the process of manufacture or 
 consumption. 
 
 "(3) Reiieivals. — While a national bank may properly enter 
 into an agreement having more than six months to run by which 
 it obligates itself to accept drafts of the kinds described in 
 Regulation C, each individual draft accepted under the terms of 
 that agreement must, in order to be eligible, conform in all 
 respects to the provisions of the law and these regulations. In- 
 asmuch as each individual acceptance must itself conform to the 
 terms of the law, no renewal draft, whether or not contracted for 
 in advance, can be eligible if at the time of its acceptance the 
 period required for the conclusion of the transaction out of 
 which the original draft was drawn shall have elapsed. The 
 question of the eligibility of renewal drafts, therefore, must nee- 
 
 — 76 — 
 
essarily depend upon the stage of the transaction at the time tlie 
 renewal drafts are drawn. 
 
 "(d) EVIDENCE OF ELIGIBILITY.— A Federal re- 
 serve bank must be satisfied, either bj'- reference to the accept- 
 ance itself, or otherwise, that it is eligible for rediscount. The 
 bill itself should be drawn so as to evidence the character of the 
 underlying transaction, but if it is not so drawn evidence of 
 eligibility may consist of a stamp or certificate affixed by the 
 acceptor in form satisfactory to the Federal reserve bank." 
 
 Acceptance of Drafts and Bills of Exchange 
 
 Regulation C, Series of 1917 
 
 ACCEPTANCE BY MEMBER BANKS OF DRAFTS AND BILLS OF EXCHANGE 
 
 [Superseding Regulation C of 1916] 
 
 By the amendments approved September 7, 1916, and June 21, 
 1917, the fifth paragraph of Section 13 of the Federal Reserve 
 Act permits member banks, under the specified conditions, to ac- 
 cept drafts or bills of exchange growing out of transactions in- 
 volving the importation or exportation of goods, or the domestic 
 shipment of goods, provided shipping documents conveying or 
 securing title are attached at the time of acceptance ; or which are 
 secured at the time of acceptance by a warehouse receipt or othei 
 such document conveying or securing title covering readily-mar- 
 ketable staples.* 
 
 Where the accepting bank is secured either by attached docu- 
 ments or by some other actual security growing out of the same 
 transaction as the acceptance, any bank may accept such bills in 
 an amount not exceeding at any time, in the aggregate, more than 
 one-half of its paid-up and unimpaired capital stock and surplus ; 
 or, upon the approval of the Federal Reserve Board, may accept 
 up to an amount not exceeding 100 per centum of its paid-up and 
 unimpaired capital stock and surplus. The aggregate amount of 
 acceptances growing out of domestic transactions shall in no case, 
 however, exceed 50 per centum of such capital stock and surplus. 
 
 The regulations of the Federal Reserve Board, covering this 
 part of Section 13 of the Federal Reserve Act, are as follows: 
 
 • A readily-marketable staple within the meaning of these regulations may be 
 defined as an article of commerce, agriculture, or industry of such uses as to make 
 It the subject of constant dealings in ready markets, with such frequent quotations 
 of price as to make (a) the price easily and definitely ascertainable and (b) the staple 
 Itself easy to realize upon by sale at any time. 
 
 77 — 
 
"The Federal Reserve Board has determined that any mem- 
 ber bank, having an unimpaired surplus equal to at least 20 per 
 centum of its paid-up capital, which desires to accept drafts or bills 
 of exchange (drawn for the purposes previously described) up to an 
 amount not exceeding at any time, in the aggregate, 100 per centum 
 of its paid-up and unimpaired capital stock and surplus, may file an 
 application for that purpose with the Federal Reserve Board. Such 
 application must be forwarded through the Federal reserve bank 
 of the district in which the applying bank is located. 
 
 "The Federal reserve bank shall report to the Federal Reserve 
 Board upon the standing of the applying bank, stating whether the 
 business and banking conditions prevailing in its district warrant 
 the granting of such applications. 
 
 "The approval of any such application may be rescinded upon 
 90 days' notice to the bank affected." 
 
 Bills Drawn to Create "Dollar Exchange" 
 
 Regulation C, Series of 1917 
 
 ACCEPTANCE BY MEMBER BANKS OF DRAFTS AND BILLS OF EXCHANGE 
 
 [Superseding Regulation C of 1916] 
 
 Under the provisions of Section 13 of the Federal Reserve 
 Act, member banks are also permitted to accept drafts or bills 
 of exchange drawn by banks or bankers in foreign countries or 
 dependencies or insular possessions of the United States for the 
 purpose of creating "dollar exchange." Such drafts or bills must 
 have not more than three months' sight to run, exclusive of days 
 of grace, and no member bank shall accept them for any one bank 
 to an amount exceeding in the aggregate 10 per centum of the 
 paid-up and unimpaired capital and surplus of the accepting bank, 
 unless the draft or bill is accompanied by documents conveying 
 or securing title or by some other adequate security. It is further 
 stipulated that no member bank shall accept such drafts or bills 
 in an amount exceeding at any time in the aggregate one-half of 
 its paid-up and unimpaired capital and surplus. This 50 per cent, 
 limit is separate and distinct from and not included in the limits 
 placed upon the acceptance of drafts and bills as described in the 
 fifth paragraph of Section 13. 
 
 The regulations of the Federal Reserve Board on the drawing 
 of drafts or bills for the purpose of furnishing "dollar exchange" 
 follow : 
 
 — 78 — 
 
"Any member bank desiring to accept drafts drawn by banks 
 or bankers in foreign countries or dependencies or insular posses- 
 sions of the United States for the purpose of furnishing dollar 
 exchange shall first make an application to the Federal Reserve 
 Board setting forth the usages of trade in the respective countries, 
 dependencies, or insular possessions in which such banks or bankers 
 are located. 
 
 "If the Federal Reserve Board should determine that the usages 
 of trade in such countries, dependencies, or possessions require 
 the granting of the acceptance facilities applied for, it will notify 
 the applying bank of its approval and will also publish in the Fed- 
 eral Reserve Bulletin the name or names of those countries, de- 
 pendencies, or possessions in which banks or bankers are authorized 
 to draw on member banks whose applications have been approved 
 for the purpose of furnishing dollar exchange. 
 
 "The Federal Reserve Board reserves the right to modify or on 
 90 days' notice to revoke its approval either as to any particular 
 member bank or as to any foreign country or dependency or insular 
 possession of the United States in which it has authorized banks or 
 bankers to draw on member banks for the purpose of furnishing 
 dollar exchange." 
 
 In Regulation C, Series of 1920, the only change from Regula- 
 tion C of 1917, previously given, is the inclusion of two sentences 
 with reference to the question of when trust receipts and bills of 
 lading drafts may be considered "actual security" within the mean- 
 ing of Section 13 of the Federal Reserve Act. It is stated in this 
 connection that a trust receipt which permits the customer to have 
 access to or control over the goods will not be considered by Fed- 
 eral reserve banks to be "actual security" within the meaning of 
 Section 13, but a bill of lading draft is "actual security" even after 
 the documents have been released, provided that the draft is ac- 
 cepted by the drawee upon or before the surrender of the docu- 
 ments. 
 
 Operations of Foreign Banking Corporations 
 
 Regulation K, Series of 1920 
 
 banking corporations authorized to do foreign banking business under 
 Section 25 (a) 
 
 As amended by the Act of September 7, 1916, Section 25 of 
 the Federal Reserve Act permitted national banks having a capital 
 and surplus of $1,000,000 or more, to invest, under certain specified 
 conditions, in the stock of banks or corporations chartered or in- 
 
 — 79 — 
 
coiporated under the laws of the United States or of any State 
 thereof, and principally engaged in international or foreign banking. 
 At that time, no means had been provided for the Federal 
 incorporation of such foreign banking corporations, but by the 
 enactment of Section 25 (a) of the Federal Reserve Act, approved 
 December 24, 1919, Congress provided a means for the incorpora- 
 tion of institutions for the purpose of engaging in international 
 or foreign banking or other international or foreign financial opera- 
 tions in whose stock national banks, as well as individuals, firms, 
 and other corporations, may invest. Under the regulations cover- 
 ing this section of the Federal Reserve Act, a Corporation* is per- 
 mitted to accept, subject to substantially the same conditions as are 
 imposed by law upon member banks, drafts drawn by banks or 
 bankers located in foreign countries, or dependencies or insular 
 possessions of the United States, for the purpose of furnishing 
 dollar exchange as required by the usages of trade in those coun- 
 tries, dependencies, or possessions. 
 
 The regulations of the Federal Reserve Board, governing 
 Acceptances under Section 25 (a), known as the Edge Bill, are as 
 follows : 
 
 "Kinds. — Any corporation may accept (1) drafts and bills of 
 exchange drawn upon it which grow out of transactions involv- 
 ing the importation or exportation of goods, and (2) drafts and 
 bills of exchange which are drawn by banks or bankers located 
 in foreign countries or dependencies or insular possessions of 
 the United States for the purpose of furnishing dollar exchange 
 as required by the usages of trade in such countries, depen- 
 dencies, and possessions, provided, however, that, except with 
 the approval of the Federal Reserve Board and subject to such 
 limitations as it may prescribe, no Corporation shall exercise 
 its power to accept drafts or bills of exchange if at the time such 
 drafts or bills are presented for acceptance it has outstanding 
 any debentures, bonds, notes, or other such obligations issued 
 by it. 
 
 "Maturity. — Except with the approval of the Federal Reserve 
 Board, no Corporation shall accept any draft or bill of exchange 
 which grows out of a transaction involving the importation or 
 exportation of goods with a maturity in excess of six months, 
 or shall accept any draft or bill of exchange drawn for the pur- 
 pose of furnishing dollar exchange with a maturity in excess of 
 three months. 
 
 •Wherever the word Corporation la spelled with a capital C, it 
 refers to a corporation organized under Section 25 (a) of the Federal 
 Reserve Act. 
 
"Limitations.— {\) Individual drawers: No acceptances shall 
 he made for the account of any one drawer in an amount aggre- 
 gating at any time in excess of 10 per cent, of the subscribed 
 capital and surplus of the Corporation, unless the transaction be 
 fully secured or represents an exportation or importation of 
 commodities and is guaranteed by a bank or banker of undoubted 
 solvency. (2) Aggregates: Whenever the aggregate of accept- 
 ances outstanding at any time (a) exceeds the amount of the sub- 
 scribed capital and surplus, 50 per cent, of all the acceptances 
 in excess of the amount shall be fully secured; or (b) exceeds 
 twice the amount of the subscribed capital and surplus, all the 
 acceptances outstanding in excess of such amount shall be fully 
 secured. (The Corporation shall elect whichever requirement 
 (a) or (b) calls for the smaller amount of secured acceptances). 
 In no event shall any Corporation have outstanding at any one 
 time acceptances drawn for the purpose of furnishing dollar 
 exchange in an amount aggregating more than 50 per cent, of 
 its subscribed capital and surplus. 
 
 " Reserves.— Kgdiinst all acceptances outstanding which mature 
 in 30 days or less a reserve of at least 15 per cent, shall be 
 maintained, and against all acceptances outstanding which mature 
 in more than 30 days a reserve of at least 3 per cent, shall be 
 maintained. Reserves against acceptances must be in liquid 
 assets of any or all of the following kinds: (1) cash; (2) balances 
 with other banks; (3) bankers' acceptances; and (4) such secu- 
 rities as the Federal Reserve Board may from time to time 
 permit." 
 
 — 81 — 
 
Chapter IX 
 
 THE UNITED STATES WAREHOUSE ACT 
 
 BECAUSE of its bearing on the subject of Acceptances, the 
 text of certain portions of the United States Warehouse Act 
 should prove both interesting and instructive to readers of this 
 booklet. Therefore, those parts of the Act which have a relation 
 to the Acceptance matter are outlined in this chapter. 
 
 The United States Warehouse Act, which was amended July 
 24, 1919, specifies the conditions under which agricultural products 
 may be stored in warehouses for interstate or foreign commerce, 
 and fixes the duties and responsibilities of warehousemen in con- 
 nection therewith. As used in the Act, the term "agricultural 
 product" means cotton, wool, grains, tobacco, and flaxseed, or any 
 of them. The Secretary of Agriculture is empowered to issue 
 licenses for the conduct of warehouses in accordance with the law, 
 and to promulgate such rules and regulations governing operations 
 under the Act as may be deemed necessary. He may also grant a 
 license to any person not a warehouseman to accept the custody 
 of agricultural products and to store them in a warehouse owned, 
 operated, or leased by any State, but such person must agree to 
 comply with the provisions of the Act and the rules and regulations 
 prescribed thereunder. 
 
 Receipts for Agricultural Products Stored 
 
 In the immediately preceding chapter of this booklet — Regula- 
 tions of the Federal Reserve Board — reference is made to the stor- 
 age of readily-marketable staples, and to the acceptance of drafts 
 and bills of exchange secured by warehouse receipts. One of the 
 requirements of the United States Warehouse Act is that a ware- 
 
 — 82 — 
 
houseman or any person accepting the custody of agricultural 
 products under the terms of the Act shall issue receipts for such 
 products, but no receipts shall be issued except for agricultural 
 products actually stored in the warehouse at the time of the issu- 
 ance thereof. 
 
 It is further stipulated that every warehouseman shall keep 
 the agricultural products therein of one depositor so far separate 
 from agricultural products of other depositors, and from other agri- 
 cultural products of the same depositor for which a separate receipt 
 has been issued, as to permit at all times the identification and re- 
 delivery of the agricultural products deposited. If authorized by 
 agreement or custom, however, a warehouseman may mingle fun- 
 gible agricultural products with other agricultural products of the 
 same kind and grade, but he must not mix fungible agricultural 
 products of dififerent grades. Where fungible agricultural products 
 of the same kind and grade are mingled, the warehouseman shall be 
 severally liable to each depositor for the care and re-delivery of 
 his share of such mass. 
 
 Contents of a Warehouse Receipt 
 
 The provisions of the Act which prescribe the contents of a 
 warehouse receipt are of especial interest and importance. 
 
 Section 18 requires that every receipt issued for agricultural 
 products stored in a warehouse licensed under the Act shall embody 
 within its written or printed terms the location of the warehouse in 
 which such products are stored, the date of the issue of the receipt, 
 the consecutive number of the receipt, and a statement whether the 
 agricultural products received will be delivered to the bearer, to a 
 specified person, or to a specified person or his order. 
 
 The rate of storage charges must also be stated, and a descrip- 
 tion given of the agricultural products received. The latter must 
 show the quantity thereof, or in the case of agricultural products 
 customarily put up in bales or packages, a description of such bales 
 or packages by marks, numbers, or other means of identification, 
 and the weight of such bales or packages. Section 18 of the Act 
 also includes a clause which specifies that the receipt must indicate 
 
 "the grade or other class of the agricultural products received 
 and the standard or description in accordance with which such 
 
 — 83 — 
 
classification has been made: Provided, That such grade or other 
 class shall be stated according to the official standard of the 
 United States applicable to such agricultural products as the 
 same may be fixed and promulgated under authority of law: 
 Provided, further. That until such official standards of the United 
 States for any argricultural product or products have been fixed 
 and promulgated, the grade or other class thereof may be stated 
 in accordance with any recognized standard or in accordance 
 with such rules and regulations not inconsistent herewith as may 
 be prescribed by the Secretary of Agriculture." 
 
 In addition to the foregoing requirements, it must be shown 
 that the receipt is issued subject to the United States Warehouse 
 Act and the rules and regulations prescribed thereunder. If the 
 receipt be issued for agricultural products of which the warehouse- 
 man is owner, either solely or jointly or in common with others, 
 the fact of such ownership must be declared. 
 
 A statement is also required of the amount of advances made 
 and of liabilities incurred for which the warehouseman claims a 
 lien. Where the precise amount is unknown to the warehouseman 
 or his agent at the time of the issue of the receipt, a declaration 
 of the fact that advances have been made or liabilities incurred, and 
 the purpose thereof, shall be sufficient. 
 
 The receipt must contain the signature of the warehouseman, 
 Vhich may be made by his authorized agent. 
 
 Unless otherwise required by the law of the State in which 
 ?he warehouse is located, when requested by the depo.sitor of other 
 than fungible agricultural products, a receipt omitting compliance 
 with subdivision (g) of Section 18 (quoted above) may be issued. 
 
 Issue of Other Than Original Receipts 
 
 The terms of the Act which relate to the issue of other than 
 original receipts stipulate that while an original receipt is outstand- 
 ing and uncanceled by the warehouseman issuing the same, no other 
 or further receipt shall be issued for the agricultural product cov- 
 ered thereby, or for any part thereof. 
 
 In the case of a lost or destroyed receipt, however, a new re- 
 ceipt, subject to the same conditions and bearing on its face the 
 number and date of the receipt in lieu of which it is issued, may be 
 issued upon compliance with the statutes of the United States 
 
 — 84 — 
 
applicable thereto in places under the exclusive jurisdiction of the 
 United States, or upon compliance with the laws of any State ap- 
 plicable thereto in any place not under the exclusive jurisdiction of 
 the United States. 
 
 If there be in such instance no statute of the United States or 
 law of a State applicable thereto, such new receipts may be issued 
 upon the giving of satisfactory security in compliance with the rules 
 and regulations made pursuant to the Warehouse Act. 
 
 Conditions Governing Delivery of Products 
 
 In the absence of some lawful excuse, a warehouseman shall, 
 without unnecessary delay, deliver the agricultural products in his 
 custody upon a demand made either by the holder of a receipt for 
 such agricultural products or by the depositor thereof. Such de- 
 mand, however, must be accompanied with an offer to satisfy the 
 warehouseman's lien, an offer to surrender the receipt, if negotiable, 
 with such indorsements as would be necessary for the negotiation 
 of the receipt, and a readiness and willingness to sign, when the 
 products are delivered, an acknowledgment that they have been 
 delivered, if such signature is requested by the warehouseman. 
 
 A warehouseman, in turn, is required to plainly cancel upon 
 the face thereof each receipt returned to him upon the delivery by 
 him of the agricultural products for which the receipt was issued. 
 
 State Laws Not Impaired by Act 
 
 Every warehouseman must keep in a place of safety complete 
 and correct records of all agricultural products in his custody or 
 withdrawn from his custody, of all warehouse receipts issued by 
 him, and of the receipts returned to and canceled by him. 
 
 Nothing in the United States Warehouse Act shall be con- 
 strued to conflict with, or to authorize any conflict with, or in any 
 way to impair or limit the effect or operation of the Uniform Ware- 
 house Receipts Act, which is a State measure, or the laws of any 
 State relating to warehouses, warehousemen, weighers, graders, or 
 classifiers. The Secretary of Agriculture is authorized to co- 
 operate with such officials as are charged with the enforcement of 
 such State laws in such States, and through such co-operation to 
 
 — 85 — 
 
secure the enforcement of the provisions of the United States 
 Warehouse Act. 
 
 The Act shall not be construed so as to limit the operation 
 of any statute of the United States relating to warehouses or ware- 
 housemen, weighers, graders, or classifiers now in force in the Dis- 
 trict of Columbia or in any Territory or other place under the ex- 
 clusive jurisdiction of the United States. 
 
 Regulations for Wool Warehouses 
 
 In accordance with the authority conferred upon him by the 
 terms of the United States Warehouse Act, the Secretary of Agri- 
 culture, under date of June 18, 1920, made public rules and regula- 
 tions governing the operation of wool warehouses. 
 
 It is the object here to outline, as briefly as possible, those 
 portions of the rules and regulations which relate to the issuance 
 of receipts for wool stored in a licensed warehouse. Every such 
 receipt shall, in addition to complying with the requirements of 
 Section 18 of the Warehouse Act, previously summarized, meet cer- 
 tain specified conditions contained in the rules and regulations pro- 
 mulgated by the Secretary of Agriculture. 
 
 One of these conditions is that the contents of a receipt cover- 
 ing wool in storage must include a declaration of the kind of wool. 
 The receipt shall have a blank space designated for the purpose, 
 in which, if the identity of the wool is to be preserved, a careful 
 estimate of the shrinkage of the wool may be stated, or in which, if 
 the identity of the wool is not to be preserved, an estimate of the 
 shrinkage of the wool shall be given. 
 
 Negotiable and Non-Negotiable Receipts 
 
 If the identity of the wool is to be preserved, its identification 
 in accordance with Regulation 5, Section 16,* is required. Where 
 the identity of the wool is not to be preserved, a clear and con- 
 
 •Regulatlon 5, Section 16. Upon the acceptance by a licensed warehouseman for 
 storage In his licensed warehouse of any lot of wool, the identity of which is to be 
 preserved, he shall store, or cause to be stored, such wool in an individual section or 
 space designated by lot or cargo numbers, or by letters, numbers, or other clearly 
 distinguishable words or signs, permanently and securely affixed thereto, or shall so 
 mark the container or containers of such wool or so place the wool In the warehouse 
 that Ita Identity will not be lost during the storage period. 
 
 — 86 — 
 
spicuous notation to that effect shall be made on the face of the 
 receipt. 
 
 The nature of the receipt must be indicated by the words "Not 
 Negotiable," "Non-Negotiable," or "Negotiable," clearly and con- 
 spicuously printed or stamped thereon. 
 
 It is also required that a receipt, whether negotiable or non- 
 negotiable, embody within its written or printed terms notice that 
 the person entitled to the re-delivery of the wool shall demand the 
 delivery of the wool not later than the expiration of one year from 
 the date of the receipt. This applies whether such person be the 
 depositor of the wool or the lawful holder of the receipt therefor. 
 
 If the wool covered by a negotiable receipt was graded by a 
 licensed grader or weighed by a licensed weigher, a statement to 
 that effect shall be made. Whenever the grade of wool is required 
 to be, or is, stated in a receipt, such grade shall be stated, until 
 such time as official wool standards of the United States are in 
 effect, in accordance with the State standards, if any, established 
 in the State in which the warehouse is located. In the absence of 
 any State standards, the grade shall be stated in accordance with 
 the standards, if any, adopted by any wool organization or by the 
 wool trade generally in the locality in which the warehouse is 
 located, subject to the approval of the Chief of the Bureau of Mar- 
 kets, or in accordance with any standards approved for the pur- 
 pose by that ofificial. 
 
 A negotiable receipt issued for wool stored in a licensed ware- 
 house shall, in addition, include a form of indorsement which may 
 be used by the depositor or the lawful holder of the receipt or the 
 authorized agent of either for showing the ownership of, and liens, 
 mortgages, or other encumbrances on, the wool covered by the 
 receipt. 
 
 Duplicating Receipts Lost or Destroyed 
 
 All copies of receipts, except those issued in lieu of the original 
 in case of lost or destroyed receipts, shall, if there be no statute of 
 the United States or law of a State providing otherwise, have clearly 
 and conspicuously printed or stamped thereon the words "Copy — 
 Not Negotiable." 
 
 In the case of a lost or destroyed receipt, if there be no statute 
 
 -87- 
 
of the United States or law of a State applicable thereto, a new re- 
 ceipt upon the same terms and conditions, and bearing- on its face 
 the number and date of the receipt in lieu of which it is issued and 
 a statement that it is a duplicate issued in lieu of a lost receipt, 
 may be issued upon compliance with the provisions set forth in 
 the following paragraph : 
 
 "Before issuing such duplicate receipt, the licensed ware- 
 houseman shall require the depositor or other person applying 
 therefor to make and file with the warehouseman (a) an affidavit 
 showing that he is lawfully entitled to the possession of the 
 original receipt, that he has not negotiated or assigned it, how 
 the original receipt was lost or destroyed, and, if lost, that dili- 
 gent effort has been made to find the receipt without success, 
 and (b) a bond in an amount double the value, at the time the 
 bond is given, of the wool represented by the lost or destroyed 
 receipt. Such bond shall be in a form approved for the purpose 
 by the Secretary, shall be conditioned to indemnify the ware- 
 houseman against any loss sustained by reason of the issuance 
 of such duplicate receipt, and shall have as surety thereon (a) 
 a surety company which is authorized to do business, and is sub- 
 ject to service of process in a suit on the bond, in the State in 
 which the warehouse is located, or (b) at least two individuals 
 who are residents of such State and each of whom owns real 
 property therein having a value, in excess of all exemptions and 
 encumbrances, to the extent of double the amount of the bond." 
 
 Regulations Covering Delivery of Wool 
 
 Section 5 of Regulation 4, covering warehouse receipts for 
 wool, stipulates that, except as permitted by law or by these regu- 
 lations, a warehouseman shall not deliver the wool for which he 
 has issued a negotiable receipt until the receipt has been returned 
 to him. 
 
 If a warehouseman deliver a part only of a lot of wool for which 
 he has issued a negotiable receipt, he shall either (a) take up and 
 cancel such receipt and issue a new receipt in accordance with these 
 regulations for the undelivered portion of the wool, or (b) shall 
 have plainly placed upon the back of the receipt an indorsement 
 showing the date of delivery, the kind of wool delivered and the 
 grade and weight thereof, and upon the face of the receipt a nota- 
 tion that partial delivery has been made in accordance with the in- 
 
 — 88 — 
 
dorsement thereon. Such indorsement, the regulations prescribe, 
 shall be signed by the person lawfully entitled to such delivery, or 
 his authorized agent, or the warehouseman shall obtain from such 
 person a separate, written acknowledgment of the delivery. 
 
 A warehouseman shall not, except as permitted by law or by 
 these regulations, deliver the wool for which he has issued a non- 
 negotiable receipt until such receipt has been returned to him or 
 he has obtained from the person lawfully entitled to such delivery, 
 or his authorized agent, a written acknowledgment thereof. 
 
 Where a warehouseman delivers a part only of a lot of wool 
 for which he has issued a non-negotiable receipt, he shall either 
 (a) comply with the requirements of Section 5, previously given, 
 as far as applicable to partial delivery, or (b) obtain from the per- 
 son lawfully entitled to such partial delivery, or his authorized 
 agent, a written acknowledgment thereof. 
 
 If a warehouseman issue a receipt for wool the identity of 
 which is to be preserved, omitting the statement of grade as per- 
 mitted by Section 18 of the Act, previously summarized, such re- 
 ceipt shall bear on its face the words "No grade stated." 
 
Chapter X 
 
 THE EDGE EXPORT FINANCE ACT 
 
 THE Edge Bill, or Edge Export Finance Act, was introduced 
 in Congress by Senator Edge of New Jersey in July, 1919, 
 After undergoing some modifications in both the House 
 and Senate, the bill became a law on December 24, 1919, upon its 
 approval by the President. 
 
 The fundamental purpose of this bill is to promote the foreign 
 commerce of the United States. Public discussions of the measure 
 have stressed the fact that under its provisions the business interests 
 of this country, with the co-operation of investors, are enabled to 
 assist in the reconstruction of Europe, and to extend long-term 
 credits to foreign buyers of American goods throughout the world. 
 The bill has a wide purpose, and is really designed to afford a method 
 for facilitating at all times the financing of American export trade 
 through the establishment of international banking or financial cor- 
 porations operating under Federal supervision. 
 
 Authority for Formation of Corporations 
 
 Authority for the formation of such corporations is contained 
 in Section 25 (a) of the Federal Reserve Act. This section, which 
 is entirely new, confers broad powers upon the Federal Reserve 
 Board, which is not only intrusted with the jurisdiction of the pro- 
 cedure relating to the organization of corporations under the Act, 
 but is also authorized to regulate their operations in numerous 
 important respects. The new legislation, in short, calls for action 
 by the Federal Reserve Board in order that its terms may be 
 carried fully into effect. 
 
 In its regulations issued in March, 1920, the Board has laid 
 down specific rules for the conduct of corporations formed under 
 
 — 90 — 
 
Section 25 (a), and has expressly stated that it reserves the right 
 to amend these regulations whenever such a course may seem de- 
 sirable. The policy of the Board will be to promulgate such regu- 
 lations from time to time as it may consider necessary to permit 
 of the development of operations under the provisions of the Act 
 in the manner contemplated by Congress, 
 
 How Corporations May Be Organized 
 
 The first paragraph of Section 25 (a), relating to the organiza- 
 tion of corporations under the Act, reads as follows : 
 
 "Corporations to be organized for the purpose of engaging 
 in international or foreign banking or other international or 
 foreign financial operations, or in banking or other financial 
 operations in a dependency or insular possession of the United 
 States, either directly or through the agency, ownership, or con- 
 trol of local institutions in foreign countries, or in such depen- 
 dencies or insular possessions as provided by this section, and to 
 act when required by the Secretary of the Treasury as fiscal 
 agents of the United States, may be formed by any number of 
 natural persons, not less in any case than five." 
 
 The next succeeding paragraph stipulates that such persons 
 shall enter into articles of association, specifying in general terms 
 the objects for which the association is formed. These articles 
 may also contain any other provisions not inconsistent with law 
 which the Corporation* may choose to adopt for the regulation of 
 its business and the conduct of its affairs. All of the persons intend- 
 ing to participate in the organization of the Corporation are 
 required to sign the articles of association, which shall then be 
 forwarded to the Federal Reserve Board and filed and preserved 
 in its office. 
 
 The Board has provided a form (Form 151) which is suggested 
 as a satisfactory form of articles of association. 
 
 Form of Organization Certificate 
 
 The persons signing the articles of association must also make 
 an organization certificate stating the name assumed by the Cor- 
 
 •Whenever the word Corporation Is spelled with a capital C, it refers to a cor- 
 poration organized under Section 25 (a) of the Federal Reserve Act. 
 
 — 91 — 
 
poration, which shall be subject to the approval of the Federal 
 Reserve Board ; the place or places where its operations are to be 
 carried on ; the place in the United States where its home office is 
 to be located ; the amount of its capital stock and the number of 
 shares into which the same shall be divided ; and the names and 
 places of business or residence of the persons executing the cer- 
 tificate and the number of shares to which each has subscribed. 
 The organization certificate must also state that it is made to 
 enable the persons subscribing the same, and all other persons, 
 firms, companies, and corporations, who or which may thereafter 
 subscribe to or purchase shares of the capital stock of such Cor- 
 poration, to avail themselves of the advantages of the Act. 
 
 The Federal Reserve Board has provided a form (Form 152) 
 for this purpose. After the persons signing the organization cer- 
 tificate have acknowledged the execution thereof before a judge 
 of some court of record or notary public, the certificate shall be 
 forwarded to the Federal Reserve Board to be filed in its office. 
 
 Authority to Commence Business 
 
 In its regulations covering Section 25 (a), the Federal Reserve 
 Board has ruled that no Corporation which issues its own bonds, 
 debentures, or other such obligations will be permitted to have the 
 word "bank" as a part of its title, and that no Corporation which 
 has the word "Federal" in its title will be permitted also to have 
 the word "bank" as a part of its title. The title of the Corpora- 
 tion, so far as possible, should indicate the nature of the business 
 contemplated, and should not resemble the name of any other 
 corporation to the extent that it might result in misleading the 
 public as to its identity, purpose, connections, or affiliations. 
 
 After the articles of association and organization certificate 
 have been approved by the Federal Reserve Board, a preliminary 
 permit to begin business will be issued. Before the Board will 
 issue its final permit to commence business, however, the president 
 or cashier of the Corporation, together with at least three of the 
 directors, must certify: 
 
 (a) That each director elected is a citizen of the United 
 States. 
 
 (b) That a majority of the shares of stock is owned by 
 citizens of the United States, by corporations the controlHng 
 
 — 92 — 
 
interest in which is owned by citizens of the United States, 
 chartered under the laws of the United States, or by firms or 
 companies the controlling interest in which is owned by citizens 
 of the United States. 
 
 (c) That of the authorized capital stock specified in the 
 articles of association at least 25 per cent, has been paid in in 
 cash and that each shareholder has individually paid in in cash at 
 least 25 per cent, of his stock subscription. 
 
 When these requirements have been met, the cashier shall 
 thereafter certify to the payment of the remaining installments as 
 and when each is paid in. 
 
 No Corporation may be organized with a capital stock of less 
 than $2,000,000, and none will be permitted to issue stock of no 
 par value. In the articles of association, the par value of each 
 share of stock must be specified ; if there is more than one class of 
 stock, the name and amount of each class, and the obligations, 
 rights, and privileges attaching thereto shall be set forth fully. 
 The purpose is to have each class of stock so named as to indicate 
 to the investor, as nearly as possible, what is its character, and to 
 put him on notice of any unusual attributes. 
 
 Rules Governing Transfers of Stock 
 
 The Federal Reserve Board, exercising the authority con- 
 ferred upon it by law, has promulgated somewhat extended regu- 
 lations governing the transfer of the stock of any Corporation 
 formed under Section 25 (a), and has ruled that shares of stock 
 shall be issuable and transferable only on the books of the Cor- 
 poration. 
 
 It is expressly stipulated in these regulations that every appli- 
 cation for the issue or transfer of stock shall be accompanied by an 
 affidavit of the party to whom it is desired to issue or transfer 
 stock, or by his or its duly authorized agent, stating, in the case of 
 an individual, whether or not he is a citizen of the United States, 
 and if a citizen of the United States, whether he is a natural-born 
 citizen or a citizen by naturalization. If the latter, the individual 
 must state whether he remains for any purpose in the allegiance 
 of any foreign sovereign or government. He must also make 
 known whether or not there is any arrangement under which he is 
 
 — 93 — 
 
to hold the shares or any of the shares which he desires to have 
 issued or transferred to him, in trust for or in any way under the 
 control of any foreign State or any foreigner, foreign corporation, 
 or any corporation under foreign control. If such an arrangement 
 exists, the nature thereof must be specified. 
 
 The same general regulations apply in the case of a corpora- 
 tion, or of a firm or company. If a corporation is not chartered 
 under the laws of the United States or of a State of the United 
 States, no further declaration is required ; but if a corporation is 
 chartered under those laws it must be declared whether or not the 
 controlling interest in such corporation is owned by citizens of the 
 United States. Where the issue or transfer of stock afifects a firm 
 or company, it must be stated whether or not the controlling interest 
 in such firm or company is owned by citizens of the United States. 
 In both cases, as in the case of an individual, there must be a 
 declaration as to whether any arrangement exists for holding the 
 shares in trust for or in any way under the control of foreign 
 interests. 
 
 Stock Held Contrary to Law 
 
 It is further provided in the regulations of the Federal Reserve 
 Board that the board of directors of any Corporation organized 
 under Section 25 (a) may, before making any issue or transfer of 
 stock, require such additional evidence as they may deem necessary 
 in order to determine whether or not the issue or transfer of the 
 stock would result in a violation of the law. The decision of the 
 board of directors shall in each case be final and conclusive. No 
 issue or transfer of stock which would cause 50 per cent, or more 
 of the total amount of stock issued or outstanding to be held con- 
 trary to the provisions of the law shall be made upon the books 
 of the Corporation. On this point, the regulations of the Federal 
 Reserve Board read as follows : 
 
 "If at any time, by reason of the fact that the holder of any 
 shares of the Corporation ceases to be a citizen of the United 
 States, or, in the opinion of the board of directors, becomes sub- 
 ject to the control of any foreign State or foreigner or foreign 
 corporation or corporation under foreign control, 50 per cent, or 
 more of the total amount of capital stock issued or outstanding 
 is held contrary to the provisions of the law or these regulations, 
 
 — 94 — 
 
the board of directors may, when apprised of that fact, forthwith 
 serve on the holder of the shares in question a notice in writing 
 requiring such holder within two months to transfer such shares 
 to a citizen of the United States, or to a firm, company, or cor- 
 poration approved by the board of directors as an eligible stock- 
 holder. When such notice has been given by the board of direc- 
 tors, the shares of stock so held shall cease to confer any vote 
 until they have been transferred as required above, and if on the 
 expiration of two months after such notice the shares shall not 
 have been so transferred, the shares shall be forfeited to the 
 Corporation." 
 
 Investments in Other Corporations 
 
 The first paragraph of Section 25 (a), as previously shown, 
 provides that a Corporation formed under this section may engage 
 in international or foreign banking or other international or for- 
 eign financial operations, or in banking or other financial opera- 
 tions in a dependency or insular possession of the United States. 
 
 No Corporation is permitted to carry on any part of its busi- 
 ness in the United States, except such as may be incidental to its 
 international or foreign business. With the approval of the Fed- 
 eral Reserve Board, agencies may be established in the United 
 States for specific purposes, but not generally to carry on the 
 business of the Corporation. In no case shall a Corporation estab- 
 lish any branches except with the approval of the Federal Reserve 
 Board, and no branch may be established in the United States. 
 
 It being contemplated by the Act that a Corporation shall 
 conduct its business abroad, either directly or indirectly through 
 the ownership or control of corporations, it is accordingly pro- 
 vided that a Corporation may invest in the stock, or other certifi- 
 cates of ownership, of any other corporation organized under the 
 terms of Section 25 (a) ; under the laws of any foreign country or 
 a colony or dependency thereof; or under the laws of any State, 
 dependency, or insular possession of the United States. This only 
 applies, however, if such other corporation is not engaged in the 
 general business of buying or selling goods or commodities in the 
 United States, and if it is not transacting any business in the 
 United States except such as is incidental to its international or 
 foreign business. 
 
 No Corporation, except with the approval of the Federal Re- 
 
 — 95 — 
 
serve Board, shall invest an amount in excess of 15 per cent, of its 
 capital and surplus in the stock of any corporation engaged in the 
 business of banking, or more than 10 per cent, of its capital and 
 surplus in the stock of any other kind of corporation. Further- 
 more, no Corporation is permitted to purchase stock in any other 
 corporation organized under the provisions of Section 25 (a) or 
 under the laws of any State, which is in substantial competition 
 therewith, or which holds stock or certificates of ownership in 
 corporations which are in substantial competition with the pur- 
 chasing Corporation. The Federal Reserve Board points out, how- 
 ever, that this restriction does not apply to corporations organized 
 under foreign laws. 
 
 Issue of Debentures and Other Obligations 
 
 By the terms of the Act, each Corporation is authorized to 
 issue debentures, bonds, and promissory notes under such general 
 conditions as to security and limitations as the Federal Reserve 
 Board may prescribe. 
 
 The approval of the Board is necessary before a Corporation is 
 privileged to make any public or private issue of its debentures, 
 bonds, notes, or other such obligations, but this restriction does 
 not apply to notes issued by the Corporation in borrowing from 
 banks or bankers for temporary purposes not to exceed one year. 
 The Federal Reserve Board expressly states that its approval will 
 be based solely upon the right of the Corporation to make the issue 
 of debentures or other obligations, and shall not be understood in 
 any way to imply that the Board has approved or passed upon the 
 merits of such obligations as an investment. 
 
 In determining the amount of debentures or other such obliga- 
 tions which may be issued by a Corporation, the Board will con- 
 sider the general character and scope of the business of the Cor- 
 poration. 
 
 Every application for the approval of an issue of debentures 
 or other such obligations by a Corporation must be accompanied 
 by a report of the condition of the Corporation in such form and 
 as of such date as the Federal Reserve Board may require. A de- 
 tailed list of the securities by which it is proposed to secure such 
 issue must also be given, together with a statement of their ma- 
 
 — 96 — 
 
turities, indorsements, guaranties, or collateral, if any, and in gen- 
 eral terms the nature of the transaction or transactions upon which 
 they were based. There must also be furnished such other data 
 as the Federal Reserve Board may from time to time require. 
 
 In advertising the issue of the obligations of a Corporation, no 
 circular, letter, or other document shall contain any reference to 
 the fact that the Federal Reserve Board has granted its approval 
 of the issue to which the advertisement relates. The Board has 
 served notice that this regulation will be strictly enforced, so that 
 there may be no possibility of such a reference being construed as 
 an approval by the Federal Reserve Board of the merits or desir- 
 ability of the obligations as an investment. 
 
 Sale of Foreign Securities 
 
 If the approval of the Board is obtained, a Corporation may 
 offer for sale foreign securities with its indorsement or guaranty, 
 but such approval, if granted, shall not be understood in any way 
 to imply that the Federal Reserve Board has approved or passed 
 upon the merits or desirability of such securities as an investment. 
 
 Where application for the approval of such sale is made, it 
 must be accompanied by a statement of the character and amount 
 of the securities proposed to be sold, their indorsements, guaranties, 
 or collateral, if any, and such other data as the Board may require. 
 
 As in the case of the issue of debentures or other such obliga- 
 tions, no circular, letter, or other document advertising the sale of 
 foreign securities by a Corporation with its indorsement or guar- 
 anty shall contain any reference to the fact that the Federal Re- 
 serve Board has granted its approval of the sale of the securities to 
 which the advertisement relates. 
 
 Regulations Governing Acceptances 
 
 Through the enactment of Section 25 (a), a Corporation is 
 permitted, under such regulations as the Federal Reserve Board 
 may prescribe, to purchase, sell, discount, and negotiate, with or 
 without its indorsement or guaranty, notes, drafts, checks, bills of 
 
 — 97 — 
 
exchange, acceptances, including bankers' acceptances, cable trans- 
 fers, and other evidences of indebtedness. 
 
 The regulations of the Board governing such operations are 
 given in detail in this booklet under Chapter VIII, "Regulations of 
 the Federal Reserve Board." To avoid repetition, they are omitted 
 here. In brief, however, it may be stated that these regulations 
 permit a Corporation to accept, subject to substantially the same 
 conditions as are imposed by law upon member banks, drafts drawn 
 by banks or bankers located in foreign countries, or dependencies or 
 insular possessions of the United States for the purpose of fur- 
 nishing dollar exchange as required by the usages of trade in those 
 countries, dependencies, or possessions. These regulations are 
 covered by Regulation K, Series of 1920. 
 
 Deposits and Reserve Required 
 
 Among the powers conferred upon a Corporation by Section 
 25 (a) is that of receiving deposits outside of the United States, 
 and of receiving such deposits within the United States as may be 
 incidental to or for the purpose of carrying out transactions in 
 foreign countries or dependencies or insular possessions of the 
 United States. 
 
 The Federal Reserve Board has ruled that outside the United 
 States a Corporation may receive deposits of any kind from indi- 
 viduals, firms, banks, or other corporations. It is expressly stipu- 
 lated, however, that if a Corporation has any of its bonds, deben- 
 tures, or other such obligations outstanding it may receive abroad 
 only such deposits as are incidental to the conduct of its exchange, 
 discount, or loan operations. 
 
 In the United States, no Corporation shall receive any deposits 
 except such as are identified with the carrying out of transactions 
 in foreign countries or dependencies of the United States where the 
 Corporation has established agencies, branches, correspondents, or 
 where it operates through the ownership or control of subsidiary 
 corporations. Deposits of this character, the Federal Reserve 
 Board has ruled, may be made by individuals, firms, banks, or 
 other corporations, whether foreign or domestic, and may be time 
 or demand deposits. 
 
 The regulations governing reserves against deposits received 
 
in the United States stipulate that a reserve of not less than 13 
 per cent, must be maintained against all such deposits. This re- 
 serve may consist of cash in vault, a balance with the Federal re- 
 serve bank of the district in which the head office of the Corpora- 
 tion is located, or a balance with any member bank. In the matter 
 of deposits received abroad, the regulations require that reserves 
 against such deposits be governed by local laws, and by the 
 dictates of sound business judgment and banking principles. 
 
 General Limitations and Restrictions 
 
 Exercising the power conferred upon it to fix such general 
 limitations and restrictions as may be deemed necessary, the Fed- 
 eral Reserve Board has ruled that the total liabilities to a Cor- 
 poration of any person, company, firm, or corporation for money 
 borrowed, including in the liabilities of a company or firm the 
 liabilities of the several members thereof, shall at no time exceed 
 10 per cent, of the amount of its subscribed capital and surplus, 
 except with the approval of the Board. 
 
 It is stated, however, that the discount of bills of exchange 
 drawn in good faith against actually existing values, and the dis- 
 count of commercial or business paper actually owned by the 
 person negotiating the same, shall not be considered as money 
 borrowed within the meaning of this regulation. The Board has 
 also decided that the liability of a customer on account of an 
 acceptance made by the Corporation for his account is not a liability 
 for money borrowed within the meaning of this regulation unless 
 and until he fails to place the Corporation in funds to cover the 
 payment of the acceptance at maturity, or unless the Corporation 
 itself holds the acceptance. 
 
 Except with the approval of the Federal Reserve Board, the 
 aggregate liabilities of a Corporation outstanding on account of 
 acceptances, average domestic and foreign deposits, debentures, 
 bonds, notes, guaranties, indorsements, and other such obligations 
 shall not exceed at any one time ten times the amount of the 
 Corporation's subscribed capital and surplus. In determining the 
 amount of liabilities within the meaning of this regulation, indorse- 
 ments of bills of exchange having not more than six months to 
 
 — 99 — 
 
run, drawn and accepted by others than the Corporation, shall 
 not be included. 
 
 Advantages of New Legislation 
 
 From the foregoing analysis of the terms of the Edge Bill 
 and the regulations of the Federal Reserve Board governing the 
 operations of corporations organized under the Act, it will be 
 apparent that important new legislation has been provided for the 
 promotion of the foreign commerce of the United States. It is 
 not the intention here to discuss at length the advantages of this 
 bill, but merely to sum up in a general way the manner in which 
 its provisions may be utilized for the purpose of facilitating 
 American export trade. 
 
 Adequate machinery for the financing of this nation's exports 
 has heretofore been lacking, and the difficulty of meeting the 
 credit requirements of foreign buyers has been an impediment 
 to the full development of this business. In the present period 
 of reconstruction in Europe, there is a special need for some 
 method whereby the financing of American exports may be facili- 
 tated, and the Edge Bill affords a practical means for the accom- 
 plishment of that object. To what extent it will prove effective, 
 will depend mainly upon the measure of support which the 
 corporations formed under the Act may receive from investors in 
 this country. 
 
 Support of Investors Essential 
 
 That the support of investors is essential to the successful 
 operation of corporations organized under the Edge Bill may be 
 judged from the fact that the funds which such corporations may 
 advance to foreign purchasers of American goods must, in the last 
 analysis, come from the investing public here. While these cor- 
 porations may extend financial accommodation to foreign buyers, 
 they are enabled to do so only through the sale of their own de- 
 bentures or other obligations to the investors of this country, the 
 money so raised being employed in paying for goods exported to 
 purchasers abroad. Without the support of investors, therefore, 
 such corporations would not be in a position to operate. 
 
 — 100 — 
 
The operations of these corporations, it is important to note, 
 are not confined to Europe alone ; they may operate in any and all 
 foreign countries, and even in the dependencies and insular pos- 
 sessions of the United States. The number of these corporations, 
 moreover, is not limited by law ; any number of them may be in- 
 corporated that meet the provisions of the Act and have the ap- 
 proval of the Federal Reserve Board. 
 
 Powers of Corporations Varied 
 
 As previously stated, such corporations have power, subject to 
 the regulations of the Federal Reserve Board, to purchase, sell, 
 discount, and negotiate notes, drafts, checks, bills of exchange, ac- 
 ceptances, and other evidences of indebtedness. They may also 
 lend and borrow money, and may accept deposits within certain 
 specified limitations. These corporations have authority, in short, 
 to conduct general banking operations. 
 
 An essential part of the business of a Corporation formed under 
 the Act, as has already been shown, is the offering of its own 
 debentures or other obligations to the investing public. Such de- 
 bentures or other obligations, when secured by collateral satis- 
 factory to the Federal Reserve Board, may be sold to anyone who 
 may care to purchase them. It is with the funds obtained through 
 the issue of its debentures or other obligations that the Corpora- 
 tion is enabled to make advances to foreign buyers, and thus aid in 
 the financing of American exports. 
 
 After the passage of the Edge Bill, its sponsor, Senator Edge 
 of New Jersey, made a statement in explanation of the purposes 
 and workings of the Act, and this statement is reproduced herewith, 
 in part: 
 
 "Now that the so-called Edge Export Finance Bill has be- 
 come a law, through approval by the President, it may be well to 
 call attention to two features of the measure. First, it is not 
 merely and solely a financial measure, and, second, it is not com- 
 pulsory. Sound business is based on sound finance, and the new 
 law is designed to strengthen both the foundation and the super- 
 structure. It provides the authority and procedure for financing 
 the American export trade, but it compels neither the Govern- 
 ment nor private enterprise to embark on the venture. 
 
 "From impoverished purchasers, an export finance corpora- 
 
 — 101 — 
 
tion accepts collateral satisfactory to the Federal Reserve Board, 
 and against this issues debentures for sale to investors, the 
 money so raised going to the American producers or exporters. 
 Under the Federal Reserve Act, banks may not rediscount paper 
 of more than 90 days' maturity; under the Edge Act, paper is not 
 rediscounted, but is held as collateral for the debentures. 
 Finally, through government supervision exercised by the Fed- 
 eral Reserve Board, the safety of all transactions is assured 
 throughout as far as is humanly possible — the vendors are paid 
 real cash, so run no risk, and the stockholders of the corpora- 
 tions and the purchasers of the debentures are safeguarded by 
 the Federal Reserve Board." 
 
 102 
 
Chapter XI 
 
 THE FEDERAL BILL OF LADING ACT 
 
 THE Federal Bill of Lading Act, which went into effect 
 January 1, 1917, renders the bill of lading a complete 
 negotiable instrument and prescribes the conditions under 
 which it shall be issued. By this new law, the liabilities of the 
 railroads are more clearly defined and the danger of loss through 
 fraudulent bills of lading is much lessened. Rules are laid down 
 for the cancellation of spent bills, and duplicate bills of lading are 
 regulated. This Act is of unusual importance to the business and 
 banking world, and a digest of it is here given, as the bill of 
 lading, in the last analysis, is not only a receipt for goods delivered, 
 but also represents the ownership and is the basis for acceptances 
 and bills of exchange, both domestic and foreign. 
 
 The Act governs bills of lading issued by any common car- 
 rier for the transportation of goods in any territory of the United 
 States, or the District of Columbia, or from a place in a State to a 
 place in a foreign country, or from one State to another, or from 
 a place in one State to a place in the same State through another 
 State or foreign country. 
 
 Two Kinds of Bills of Lading Defined 
 
 Two kinds of bills of lading are defined : the straight bill and 
 the order bill. 
 
 A straight bill is one which states that the goods are con- 
 signed or destined to a specified person. It is not negotiable and 
 must be so marked by the carrier. 
 
 An order bill is one in which the goods are consigned to the 
 order of any person, and is always negotiable, unless upon its face 
 and by written agreement the shipper distinctly specifies to the 
 contrary. Order bills may not be issued in parts or sets for the 
 transportation of goods to any place in the United States on the 
 
 — 103 — 
 
Continent of North America, except Alaska and Panama. If so 
 issued, the carrier will be held liable to anyone who purchases a 
 part of the shipment for value in good faith, even though the pur- 
 chase be made after the delivery of the goods. Order bills, how- 
 ever, may be issued in parts or sets for the transportation of goods 
 to Alaska, Panama, Porto Rico, the Philippines, Hawaii, or foreign 
 countries. When more than one order bill is issued for goods to 
 be transported within the boundaries of the Continental United 
 States, the word "duplicate," or some other word or words indi- 
 cating that the bill is not an original, must be placed plainly on 
 the face of each bill, except the one first issued. A bill marked 
 "duplicate" makes the carrier liable only to the extent of declaring 
 that it is a true copy of the original. The insertion in an order bill 
 of the name of a person to be notified of the arrival of the goods 
 does not limit its negotiability. 
 
 To Whom Carriers May Make Delivery of Goods 
 
 Carriers, in the absence of a lawful excuse, must make deliv- 
 ery to the consignee named in a straight bill, and to the holder of 
 an order bill if the demand is accompanied by an offer to satisfy 
 the carrier's lawful lien upon the goods; or by an offer to sur- 
 render the bill, properly indorsed ; or by a willingness to sign a 
 receipt for the delivery of the goods. 
 
 The carrier is also justified in delivering the goods to a person 
 lawfully entitled to their possession; to the consignee named in a 
 straight bill; or to a person possessing an order bill which states 
 that the goods are to be delivered to his order, or which has been 
 indorsed to him, or in blank, by the consignee. 
 
 Deliveries for Which the Carrier Is Liable 
 
 A carrier is liable when delivery is made to one who is not 
 lawfully entitled to the goods; also when the carrier has been 
 requested by a person having a right of property or possession not 
 to make delivery; or when informed at the time of delivery that 
 it was to a person not lawfully entitled to the possession of the 
 
 — 104 — 
 
goods, provided that such information be given to a proper agent 
 of the carrier in time to stop delivery. 
 
 The carrier is also liable w^hen it fails to take up and cancel an 
 order bill on delivery. The exceptions are : when the carrier acts 
 under compulsion of legal process, or if the bill is later acquired 
 for value in good faith; and when it fails to mark the bill with a 
 description of the partial delivery. 
 
 Any alteration, addition or erasure in a bill, if made without 
 the carrier's authority, is void. When a bill is lost, stolen or 
 destroyed, a court of competent jurisdiction may order the deliv- 
 ery of the goods upon satisfactory proof, upon an indemnifying 
 bond being given, and the payment of the carrier's costs and coun- 
 sel fees. A voluntary indemnifying bond without a court order 
 is binding, but it will not relieve the carrier from liability in case 
 the order bill has been negotiated for value without notice of 
 delivery. 
 
 A carrier is liable for non-delivery when the title has not been 
 transferred to the carrier by the consignor or consignee, or when 
 the carrier has no lien on the goods. 
 
 When the goods are claimed by one or more persons, the 
 carrier may require all known claimants to interplead. 
 
 A carrier is not liable for the non-delivery of goods if he 
 has information that some person other than the consignee or 
 holder of the bill has a claim to their title or possession, but this 
 limitation continues only until the validity of the adverse claim 
 is determined. 
 
 "Shipper's Weight, Load and Count" 
 
 When the goods are loaded by the carrier, the carrier must 
 count the packages, when it is package freight, and must ascer- 
 tain the kind and quantity if it is bulk freight. If "Shipper's 
 weight, load and count" is inserted in a bill under the foregoing 
 conditions, such insertion will be held to be void. 
 
 If the shipper loads the goods and the bill states that it is 
 the shipper's weight, load and count, the carrier must ascertain 
 the kind and quantity of the merchandise, but is not liable for 
 improper loading or misdescription of the goods in the bill of 
 lading. 
 
 — 105 — 
 
Where the shipper of bulk freig^ht installs adequate facilities, 
 and makes the request in writing, the carrier shall ascertain the 
 kind and quantity of the bulk freight, and, upon verification, need 
 not insert "Shipper's weight," etc., in the bill. 
 
 Rights of Creditors to Attach Bills of Lading 
 
 A carrier is liable for the acts of its authorized agent to the 
 owner of goods covered by a straight bill, and to the bona fide 
 holder for the value of an order bill, although the goods may not 
 be received by the carrier or may be misdirected. 
 
 While in possession of a carrier, goods may not be attached 
 by garnishment or otherwise, unless the bill is first surrendered 
 to the carrier or its negotiation enjoined. A creditor whose debtor 
 is the owner of an order bill is entitled to the aid of courts of 
 jurisdiction in attaching such bill. When an order bill is issued, 
 a carrier has a lien on the goods for all transportation and delivery 
 charges. After the goods have been sold to satisfy that lien, or 
 when goods have not been claimed, or when they are perishable or 
 hazardous, the carrier is not liable for delivery. 
 
 Negotiating or Transferring Bills of Lading 
 
 An order bill may be negotiated by tlie indorsement of the 
 person to whose order the goods are deHverable, which indorse- 
 ment may be in blank or to some specified person. Subsequent 
 negotiation may be made in like manner. 
 
 A bill may be transferred by the holder by delivery, accom- 
 panied by an express or implied agreement to transfer title to the 
 bill or to the goods it represents. A straight bill cannot be nego- 
 tiated free from existing equities. 
 
 An order bill may be negotiated by any person who possesses 
 it, if by the terms of the bill the carrier undertakes to deliver the 
 goods to the order of such person, or if at the time of negotiation 
 the bill is in such form that it may be negotiated by delivery. 
 
 The person to whom an order bill has been duly negotiated 
 acquires thereby such title to the goods as held by the negotiation, 
 the consignor or the consignee. 
 
 — 106 — 
 
The person to whom a bill has been transferred, but not 
 negotiated, acquires thereby as against the transferor of the title 
 to the goods, subject to the terms of any agreement with the trans- 
 feror. If it is a straight bill, such person has the right to notify 
 the carrier of the transfer, and thereby becomes the direct obligee 
 of the carrier's obligations. A transfer, however, may be defeated 
 by garnishment by a creditor, or by prior notification to the 
 carrier of a subsequent sale of the goods by the transferor, which 
 notification, however, must be made within a reasonable time. 
 
 Where an order bill is transferred for value by delivery, the 
 transferee acquires right against the transferor to compel him to 
 indorse the bill when this is essential for negotiation. 
 
 Warrants, Indorsements, Rights and Remedies 
 
 A person who negotiates or transfers for value a bill by indorse- 
 ment or delivery, unless a contrary intention appears, warrants: 
 that the bill is genuine; that he has a legal right to transfer it; 
 that he has knowledge of no fact which would impair the validity 
 or worth of the bill ; and that he has a right to transfer the title to 
 the goods. 
 
 The indorsement of a bill does not make the indorser liable 
 for obligations of prior indorsers or for any failure on the part 
 of the carrier to fulfill their respective obligations. 
 
 A mortgagee or pledgee or other holder demanding payment 
 of a debt is not deemed by so doing to warrant the genuineness 
 of the bill held as security, or the quantity or the quality of the 
 goods. 
 
 The validity of the negotiation of a bill is not impaired when 
 received in good faith for value, even though the negotiation was 
 a breach of duty, or if the owner should have been deprived of 
 the bill by fraud, accident, mistake, duress, loss, theft or con- 
 version. 
 
 Where a person has sold, mortgaged or pledged goods which 
 are in the carrier's possession, covered by an order bill, or has 
 done so while the order bill representing the goods continues in 
 his own possession, the subsequent negotiation by that person 
 has the same effect as if the first purchaser of the goods or bill 
 had expressly authorized the subsequent negotiation. 
 
 — 107 — 
 
No lien or right of stoppage in transit defeats the right of 
 a purchaser of an order bill in good faith. The carrier is not 
 justified in delivering the goods to an unpaid seller unless the 
 bill is first surrendered for cancellation. The rights and remedies 
 of a mortgagee or lien holder against the purchaser of a bill for 
 value are not limited, except as above. 
 
 Forgeries, etc., are to be judged misdemeanors punishable by- 
 imprisonment not exceeding five years, or by fine not exceeding 
 $5,000, or both. 
 
 — 108 — 
 
APPLICATION FOR COMMERCIAL LETTER OF CREDIT, 
 
 ...Jaaqary: 19th » ISZI^ 1 9 
 
 THE AMERICAN EXCHANGE NATIONAL BANK 
 
 NEW YORK. 
 Gentlemen 
 
 P'««se ^^ by *^' your COMMERCIAL LETTER OF CREDIT as per particulars beloiw 
 
 for which we will duly sign your form of contract 
 
 In favor of Messrs . . John . Doe and Company ^ Y okoh ama > Japan ._ 
 
 Available by Drafts on yOUjeeXV-es ;;r,T,^"pu« 
 
 For Account of-iiessxs. Henry. .Jones. And Coinps_ny.^New_Y^^^ 
 
 For not exceeding $10>000# . 
 
 Drafts Drawn at four_month6... sight 
 
 Against Shipment Of -general merchandise freight .prepaid 
 
 Shipment from Japan to We.w_York. 
 
 Bill of Lading to be dated not later than April, 15 tll,_1921 
 
 Marine Insurance to be effected by shipper 
 
 War Insurance to be effected by V. . 
 
 
 ( If Insurance ii effected by applicant please state names of Jtisuranct Companies and give Policy Numieri.) 
 All Insurance to be in first class companies and policies delivered lo you ^required. 
 
 DOCUMENTS TO ACCOMPANY DRAFTS: 
 
 Invoice ~.X — Insurance Certificates X.__ , 
 
 Bills of Lading X Weight Certincate.f. . 
 
 Consular Invoice X ^ .._____ 
 
 Drafts to be drawn prior to May..lst^ 1921 » .,_ _ _...,. _ 
 
 Deliver documents when received by you ta -Henry .JjOnes afuLjCou >. JteKjIToXlC* _^ 
 
 REMARKS 
 
 Yours truly, 
 
 Henry Jones and Company 
 
 Form of Application for Commercial Letter of Credit 
 
z^4e^J^nM/}m^0amrj}m^^ 
 
 Jan. 
 
 '^ 
 
 ty^^et^^^r^f 
 
 (0.0,000.00*- 
 
 vi^fvxa^^^rii^E^v/s^j^^ %' ^OOOOf 
 
 .^^^J^/y^JANUABY 19th, 1921. 
 
 o(cy^e^f^J JOHN DOE AND COMPANY, 
 
 YOKOHAMA, JAPAN. 
 
 ^<fe%yw;'^.^MESSRS. HENRI JONES & COMPANY, NEVf YORK, N. Y. Jiy^n^^^wt^yn/' 
 
 -TEN THOUSAND. 
 
 '/iW^~ 
 
 -POUR (4) MONTHS- 
 
 ,a/^mm^ GENERAL MERCHANDISE PROM JAPAN TO NEW YORK. '^FREIGI 
 
 BY SHIPPERS, CERTIFICATES TO ACCOMPANY DRAFTS. 
 
 ^A^y<^^^^u/e:/i^^^f'^(ki^^^?t^J(a!.^^^^ 15TH, 1921. 
 
 0yra^/?m^Mf^ "Qffa6/^i',a^fi4/'£^.(Sji^ML/Cjf^Q)0000lf—-' ^ru^ 
 ^ V MAY IST, 1921. 
 
 
 'H^nai^ioar^ 
 
 
 Form of Commercial Letter of Credit 
 

 
For and in consideration of the acceptance by THE AMERICAN EXCHANGE NATIONAL 
 
 BANK, NEW YORK, of our draft (s) on them numbered _-8.7. dated... Jan .. a4r» JL9aL. 
 
 payable . ^aai^Aoya. Data,, . at TKfl AmaTjcui RxchangOL Hatioaal 
 
 Bft.n,^..,. JSaa ,Xo£3^^ H . Y . 
 
 for ElejjBJi-_thQ.usaDd-.--£lr.fl-..iiuridxed, .lDrJ:iy r-t»o^ _00/ 100=1--=.;=^. r^,^^^.;;^,,.^^ Dollars, 
 
 {%X 1 > &^L3ji-=z ), as part of the same transaction, we hereby promise and igree, on or before 
 
 the day prior to the due date of said draft to pay in New York funds to the Bank the amount payable 
 by the said Bank thereon, and as collateral security for the doe and punctual performance for such obli- 
 gation, as well as for the payment of any and every debt or liabihty of every nature from the under- 
 signed to said BapK we hereby deposit with and assign and transfer to said Bank the following 
 property : 
 
 jalLYA-MJLi:ittE<aJtgjL£rQ»a Italy. 
 
 with other additional collaterals as may from time to time be required by any of the officers of said 
 Bank, and which the undersigned hereby promises to furnish on demand. And the undersigned hereby 
 gives to said Bank, or its assigns, full power to sell, assign or deliver the whole or any part of 
 said collaterals, or any substitute therefor, or any additions thereto, at any Brokers' Exchange or else- 
 where at public or private sale, at the option of such holder, on the non-performance of any of the 
 premises herein contained, and without notice of amount due or claimed to be due, without demand 
 of payment, without advertisement and without notice of the time or place of sale, each and every of 
 which is hereby expressly waived ; and on any such sale, the Bank, its assigns or any of the officers of 
 said Bank, may purchase on its own account, and without further accountability except for the pur- 
 chase price thereof, the whole or any part of the property sold free from any right of redemption on the 
 part of the undersigned, which right is hereby waived and released. 
 
 It is further agreed; that any surplus arising from the sale of said collaterals beyond the amount 
 due hereon, shall be applicable upon any claim of the said Bank arising directly or by assignment 
 against the undersigned at the time of said sale, whether the same be then due or not due. 
 
 And it is further agreed that any moneys or properties, at any time, in the possession of THE 
 AMERICAN EXCHANGE NATIONAL BANK, NEW YORK, belonging to any of the parties liable 
 hereon to said Bank, and any deposits, balance of deposits or other sum at any time credited by or due 
 from said Bank to any of said parties, shall at all times be held and treated as collateral security for the 
 payment of any other obligation, indebtedness or liability of the undersigned to the said Bank, whether 
 due or not due, and said Bank may at any time, at its option, set ofif the amount due or to become 
 due hereon or any Other obligations against any claim of any of said parties against said Bank. 
 
 And it is further agreed that upon the non-performance of any of the promises herein contained, 
 that any and all claims held hy the said Bank at such time and arising directly or by assignment 
 against the undersigned shall immediately become due and payable. 
 
 It is also agreed that said collaterals may from time to time, by mutual consent, be exchanged 
 for others, which shall also be held by said Bank on the terms above set forth, and may be applied to 
 any other obligation now or hereafter to be incurred by the undersigned to said Bank, whether due 
 or to become due. 
 
 The rights given by this document to the said Bank are transferable by endorsement 
 
 JOSSPH SMITH & COMPAWY 
 New York ISJm&nLJSAjih,^ 19.21 
 
 Form of Acceptance Credit Agreement 
 

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