181. Limitations To Finance Paper Issue

Where is the limit to the practice? Only in the credit of the houses concerned, in the willingness of the exchange market here to absorb offerings of their long paper and the willingness of the London bankers to discount it when it is sent abroad. Otherwise there is no check upon the amount of finance-paper that a house might put out. No mark distinguishes it from any other kind of long bill; the banker who buys it cannot tell whether he is buying a bill of exchange secured by railroad first mortgage bonds or whether it is a finance-bill put out with nothing back of it to "raise the wind." There is no way for him to tell. His protection and his only protection is in the character of the drawer and the acceptor and in his knowledge of how much of the paper there may be knocking around in the open market.

Finance-bills have at times played a very important part in our financial history, the last time being in 1906 and 1907. That episode was thus recently described by John Gardin, vice-president of the National City Bank, New York.

Finance bills were issued in this country up to the spring of 1907 in enormous quantities. It was estimated that in the fall of the year when these bills generally are paid off, there was running all the way from $250,000,000 to $300,000,000 in finance bills. The merchants, particularly here in the East, have credits in the financial institutions abroad and sell these bills here and get their money. The brokers in Wall Street instead of negotiating time money here, negotiate sterling loans.

These loans are generally put out in the spring of the year when exchange is high, due to the enormous amount of imports that have to be paid for. They are generally issued so as to bring their maturity in the fall when the exports of staples from this country prevail and exchange rates are very low. The result is that where a man issues a bill originally when exchange is high and redeems it when the exchange is low, together with the commission he has to pay and the discount he has to allow, he finds as a general rule he pays a very low rate of interest; in some cases, 1 to 1 1/4 per cent.

In 1906, before the San Francisco disaster, we had quite a large gold importation and a great howl was raised in England by the financial writers to the effect that the enormous gold importations were facilitated by the credits granted for these long bills, by banks over there permitting their names to be used. There was quite a crusade against them. Any bank in London mak-ing a practice of loaning money in this country by means of these acceptances was looked down upon. In 1907 most of these credits were canceled. I don't believe $25,000,000 or $30,-000,000 were owing to Europe in July and August on the strength of these credits. The result was that when the export season started in, due to the hard time we were having, and exports assumed undue proportions, there was no offset in the way of the redemption of these credits. In consequence, Europe had to give up its gold.