THE DEVELOPMENT OF AN ACCEPTANCE MARKET IN THE 



UNITED STATES. 



BAY V. LEFFLEB. 



"Credit is tlie lifeblood of business. One of the principal channels 

 through which it flows is the acceptance, or time bill of exchange." In Eng- 

 land, France, and Germany, the acceptance credit system is very old and has 

 been thoroughly developed, while in the United States it is comparatively new 

 and not so well understood. 



On November 14th, 1914, the Federal Reserve System was put into opera- 

 tion, and to that system we owe the real beginnings of an acceptance market in 

 this country. The principal idea of this system is to secure the liquidity of 

 bank assets, — that is the possibility of readily and quickly converting them into 

 money. In the case of commercial banks these liquid assets must be fur- 

 nished by the different businesses which are the clients of the several banks, 

 and so the initiative must come from the business men of the country, through 

 the methods used in financing trade transactions, viz. : the furnishing of a 

 supply of liquid commercial paper very largely by means of acceptances. 



As an illustration of an acceptance, — suppose that a seller of goods draws 

 a trade bill upon the buyer for the amount of the bill, and payable at sight in 

 sixty days, then the buyer writes across its face the word "accepted" and 

 signs his name with the date of the acceptance. Thus is created a credit 

 instrument of the better sort, — a trade acceptance, and which, from the 

 banker's point of view, is the ideal form of commercial paper, since it bears 

 two names, represents a self-liquidating transaction, is almost certain to be 

 paid at maturity, and may be converted into cash by offering it for redis- 

 count at a Federal Reserve Bank, at a preferential rate, or by sale in the 

 open market. 



The bank acceptance differs from the trade acceptance in that the seller 

 draws the bill upon the buyer's bank instead of upon the buyer. The bank 

 accepts the bill, according to arrangements made in advance with the buyer, 

 and then sends it to the seller, who in turn may sell it in the open market, 

 discount it at the bank, or hold it until maturity. 



From the business man's point of view, the acceptance enables business 

 to be transacted at a smaller operating cost; it reduces the amount of losses 

 from bad debts, and it does not decrease buying power but assures a safe- 

 guard against over-buying. The general benefits of the acceptance are not to 

 be disputed, but not until this credit instrument is more fully imderstood, and 

 some of the diflBculties are overcome, will its full advantages be secured. 



21st Mich. Acad. Sci. Kept, 1919. 



