Trade Acceptances

When Roy Archibald Young newly installed Governor of the Federal Reserve Board rose brusquely from his dining chair at the ninth annual meeting of the American Acceptance Council in Manhattan last week, members studied the blocky, curly-headed man inquisitively. Mr. Young had a reputation for diffidence. When President Coolidge appointed him from comparatively obscure Minnesota to be Board governor, Mr. Young had said: "I consider it a great compliment the President of the United States has paid me. I hope he will never regret the confidence he has placed in me." When asked to what he attributed his rise from bank messenger to Governor of the Federal Reserve Bank in Minneapolis and higher, during 27 years, he had answered laconically: "Observation and hard work." That was platitudinous.

In Manhattan last week he was suave. It was pleasant, he said, to address "men whose names I have heard for years, but whom I have not before had the opportunity of meeting." Warmed, the Manhattan bankers applauded him.

They heard him explain how the Federal Reserve Board had decided to make smoother their financing of foreign commerce.

After a businessman ships a batch of goods, he frequently needs cash. He goes to his bank with documents showing that he has shipped the goods and that he will be paid a certain sum on a certain date. If his commercial credit is good and if the credit of the buyer is good, the bank will discount his "paper." Such "paper" is a "trade acceptance." U. S. banks at present have between $800,000,000 and $900,000,000 worth of trade acceptances representing domestic commercial transactions. They have even more--$975,000,000--representing international business, i. e., U.S. imports & exports. If the bank needs ready cash and if it is a member of the Federal Reserve System, it re-discounts its paper with its regional Federal Reserve bank. If it is not a member, some large private bank with which it is affiliated may give it re-discount service. The Federal Reserve banks have been fairly liberal at discounting commercial paper which represented commerce within the U. S. Foreign transactions are more risky than domestic. Longer time intervenes between shipment and payment; facts about a foreign businessman's credits are less certain; goods may be lost or damaged in shipment. Therefore the Federal Reserve banks have been reluctant to accept foreign trade acceptances for re-discount. Of the nearly billion dollars worth of such paper in the U. S., the Federal Reserve banks hold scarcely a fourth--an average so far this year of $244,000,000. But international trade depends upon the fluidity of such paper. English bankers own approximately $1,464,000,000, Dutch bankers between $145,000,000 and $153,000,000, Swiss bankers about $109,000,000. The Federal Reserve restrictions have been as a checkrein on U. S. international bankers. Therefore those who attended the American Acceptance Council meeting in Manhattan last week applauded when Governor Young explained the new leniency of the Federal Reserve Board: "Bankers' acceptances may properly be considered as growing out of transactions involving the importation or exportation of goods when drawn for the purpose of financing the sale and distribution on usual credit terms of imported or exported goods into the channels of trade, whether or not the bills are accepted after the physical importation or exportation has been completed.

"Due care should be observed, however, to prevent a duplication of financing, and a second acceptance arising out of the same transaction or series of transactions involving the same goods should be in effect merely an extension of an already existing credit. Thus, if one acceptance is issued to finance the shipment of goods to a foreign country and a second acceptance is issued to finance the distribution of such goods into the channels of trade, the proceeds of the second acceptance should be used to retire the first acceptance."