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Acceptances in Our Domestic and International Commerce, by Paul M. Warburg, Chairman Executive Committee, American Acceptance Council.

Reprinted by permission from a pamphlet issued by the American Acceptance Council, June 10, 1919.

This is the third time you have honored me with an invitation to address a Credit Men's convention, and genuine, indeed, is my appreciation of your generous willingness to listen to me again. All the greater, however, has been my embarrassment to write for you a new variation to the same old song, and to find a tune that would not sound stale to such patient friends.

Barely a year ago it was my privilege to speak to you at Chicago on the topic of trade acceptances, in the educational propaganda for which, from the inception of the movement, your Association had taken a leading part. Since then the Trade Acceptance Council has enlarged its name and scope into the "American Acceptance Council" whose widened field of activity now also embraces the "bankers acceptance." This was a natural evolution and followed as the logical consequence of our country's increasing interest in world trade and world finance. The trade acceptance, in its most important aspects, relates to our domestic business; the bankers acceptance renders its primary service in financing foreign trade. What could have been more timely, therefore, than for the Trade Acceptance Council to adjust its gait so as to keep step with Uncle Sam's rapid strides into foreign fields?

I need not assure you that this new departure could not possibly imply that the Council's interest in the development of the trade acceptance has lessened. No such thought could occur to anyone conscious of the fact that our domestic trade commands a position of vastly greater importance than our foreign trade, both as to volume and character. The enlarged program of the Council simply meant the inclusion of the bankers acceptance in addition to, not in substitution of, the trade acceptance, and the accession to the old Council of new members chosen from among the most prominent experts in foreign banking in the leading financial centers of the country. The Credit Men's Association continues to be represented on the Council by your energetic SecretaryTreasurer, Mr. Tregoe, and I feel certain that in its wider aspect our undertaking will enlist an even keener interest on your part than in the past.

The American Acceptance Council, upon your invitation and in anticipation of this conference, held here yesterday an all day session, when both the trade and bankers acceptance were carefully discussed in

highly instructive addresses and debates. Some of you were present at these meetings, and to all interested the speeches will be made available in printed form, so that it would be inadvisable for me now to go into a detailed discussion of the technique of the acceptance problem. I believe that you would prefer that I survey the field in broad outlines, with an incidental sketch of the future plan of operation of the Council. Trade acceptances. I shall touch only slightly upon the question of trade acceptances. You permitted me to go fully into that phase of the question about a year ago, and I have very little to add; except that nothing has developed to alter the views which I then expressed, and that quite a good deal has happened to confirm them. A constantly increasing number of merchants testify that by adopting the trade acceptance they have simplified their operations, strengthened their financial security, and thereby their general ability to do business. It is true that a few opponents continue an antagonistic propaganda, but their attitude reminds me of the resistance encountered at the time when Federal Reserve banks were making their greatest efforts to secure the membership of State banks and trust companies. Old-fashioned State bankers then used to sit up at nights figuring out to a nicety what they would lose by joining the Federal Reserve System. Detailed theoretical calculations were submitted and made the basis of their arguments. But while they were thus making out their hypothetical cases, those amongst them who were capable of vision and of a more national point of view had joined the system. When, later on, groups of banks were invited for a discusssion of the "pro's and con's" involved in membership, Federal Reserve officials were mindful to have represented some State bank or trust company that had joined. These new converts invariably reported the fact that membership had not only given them greater security, but that it had also resulted in their increasing their earnings through their new affiliation rather than suffering a loss. That always closed the discussion. On the one hand we had hypothesis; on the other we had facts.

I am strongly inclined to believe that the trade acceptance discussion has reached a similar status. The hundreds of firms basing their evidence not on theory but on results actually achieved and benefits realized, tell their own convincing stories.

Acceptance Council's attitude.-When, as Chairman of the Council's Executive Committee, I recently addressed its first Executive Committee meeting, I tried to sum up its views in the following statement: "We are preaching the gospel of the trade acceptance for no other purpose than that we believe its use makes for sounder business and banking conditions. We do not say that single name paper is not good,

or illiquid; but we may fairly say that the trade acceptance is better and more liquid. We do not say that the trade acceptance serves all purposes and that all cash sales and all cash discounts ought to be avoided; but we do say that where business is not done on a strictly cash basis, the trade acceptance will be found the safer, sounder, and, in the long run, more economical method than the open accounts.

"Indeed we believe that it is so much of an improvement over the open account that in some cases sellers, at present sacrificing a very heavy cash discount for the purpose of avoiding the dangers and inconveniences of open accounts, might find it to their advantage to consider the economy involved in the use of the trade acceptance when dealing with customers of strong credit.

"We do not want to appear as wishing to force upon anybody the adoption of the trade acceptance, unless he considers it as serving his better interest. We do wish, however, those who can profit from the method to study it carefully and not to hesitate to adopt it. The American Acceptance Council's interests in the matter is that whatever makes for better morals in business and for better credit and banking conditions is a decided benefit to the United States."

Anomalous rate structure. It is true that during the last year the progress of the trade acceptance has not been as rapid as it might have been under ordinary circumstances; for while it has gained new converts in large numbers, measured in volume its growth has been greatly retarded by the anomalous war structure of our discount rates.

In normal times Federal Reserve banks would be expected to establish rates for bankers acceptances substantially lower than for single name paper, and about halfway between these two there should be the discount level for trade acceptances. That was the original scheme of the Federal Reserve Board when formulating its principles with regard to the rate schedules for the various classes of paper. Our entrance into the world struggle intervened, and in order to facilitate the government's war financing, justly entitled to our very first consideration, rates had to be established favoring the so-called war paper; that is, bills secured by government certificates or bonds. This led to an incongruous rate structure resulting in the present abnormal condition, when about 80 per cent of all the bills held by the Federal Reserve banks— that is, about $1,800,000,000, out of $2,150,000,000-consists of war paper. The total loans and discounts of member banks amount to roughly $13,500,000,000. It is clear, therefore, that when engaging in rediscount operations with the Federal Reserve banks in order to provide for their commercial requirements, member banks primarily used their war paper, inasmuch as it commands the lowest of all rates. This

rendered illusory one of the main advantages originally intended to be derived from the ownership of trade acceptances and bankers acceptances that is, a preferential discount rate.

Indeed, the differential between Federal Reserve bank rates for commercial paper and bankers acceptances having shrunk to approximately one-half of one per cent, it no longer leaves between them an adequate space for a third and an effective intermediate rate for trade acceptances. The normal level for discount rates.-It has now become the country's very serious duty to liquidate as rapidly as possible the war paper and holdings of government bonds in the hands of banks and trust companies. This item, representing undigested government bonds amounting, it is estimated, to more than four billion dollars, constitutes one of the fundamental causes of banking inflation. In order to promote their absorption by the savings of the people and in order to encourage thrift by compelling borrowers, if necessary, to reduce their loans, Federal Reserve bank rates for paper secured by government bonds in due course will have to be increased. They would have to approach more closely the then governing rates for commercial bills, while rates for bankers acceptances should be held at a rate sufficiently lower to provide for an ample margin in their favor against single name paper. And between these two rates the trade acceptance should find its proper level.

As this process of absorption takes place, and as the government reduces the volume of outstanding Certificates of Indebtedness, acceptances may be expected to regain their proper position as the most available and safest pass-key to the facilities of the Federal Reserve banks. Ultimately acceptances are bound to become the main investment and rediscount field for Federal Reserve banks and this demand alone will create a large market for them at favorable rates.

It may take a year or two before this course makes appreciable headway, but it is to be hoped that at an early date we may see the beginning of a definite policy pointing in that direction.

British discount and gold policies. In determining the future level of our bankers acceptance rates, the British discount rate will play an important rôle. Sooner or later our rate and the British must be brought into a proper relation. It is impossible to predict exactly in what manner this will be accomplished. Our British friends at the end of the war have now established a gold embargo, while it may be expected that our gold embargo will be raised upon the signing of peace, if not at an earlier date.

England's future foreign exchange and discount policy is still undecided. At present there exist two divergent schools of thought: One, led by Lord Cunliffe, believing that foreign exchanges must be brought

back to their pre-war levels by the establishment of a high British discount rate. That school holds to the old doctrine that high rates of interest will draw gold freely into a country enjoying a strong banking credit. If such a course were adopted, it might safely be followed by the lifting of the British gold embargo. The proponents of this policy are opposed, however, by another group of British political and financial leaders urging the maintenance of the gold embargo, preserving present artificially low interest rates under its protection, and allowing sterling exchange to remain at a discount in several foreign countries, particularly in the United States. It is difficult to see how such a policy, in the long run, may be expected to bring about a healthy cure. Whether or not it may be advisable for England to continue it as a temporary device is a matter that only British leaders can judge. My own belief is that sooner or later England, whose banking prestige and power have rested so largely upon the tradition of a free gold market, will adopt a course leading toward the lifting of the gold embargo, that is, a policy of higher and effective discount rates. To me it remains a riddle how noteissuing banks, on both sides of the water, could hope to effect "deflation" unless they take steps not only to arrest a further increase in their investments, but indeed to decrease them. And this they can achieve only by placing their active official rates above those of the open market.

Continued inflation or readjustment?-It is an evil condition that prolongs the necessity for governments to issue billions of bonds or currency for the purpose of paying millions of people who idle. It intensifies the inflation of prices because it continues to swell the outstanding amount of money and credit, while, at the same time, idleness interferes with a proportionate increase of goods. But this state of things, bad enough in itself, is aggravated most viciously if, in order to place government bonds (issued for unproductive purposes) upon a low interest basis, the general level of rates of interest is artificially lowered and bonds, instead of being absorbed by savings, are carried by manufacturing new credit, be it through added bank loans or circulation. "During war the laws are silent," is an old Roman saying, which applies with equal force to economic laws. But the war, happily, is ended and we must now boldly face the question of whether we wish unconditionally to surrender to inflation and accept it as a finality-that is, sacrifice all services rendered in the past to the services of the futureor whether we are determined to work toward a readjustment in the direction, at least, of the pre-war level, though nobody expects us even approximately to reapproach it.

It is a pathetic fact that peoples, like children, apparently can learn only from their own experiences, but not from the experience of others.

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