Self Liquidity Of Trade Acceptances

The banker, in lending money on single name paper has no concrete idea as to where the depositor is going to get the money to meet the note when due.

In the discount of trade acceptances, he knows that certain goods have been shipped to the acceptor and that through the sale of these goods during the period that the trade acceptance is outstanding, the acceptor expects to get the money with which to meet the trade acceptance at maturity.

Rediscount Priviliges Of The Banker

Under the provisions of the Federal Reserve Act, the banker is privileged to rediscount trade acceptance with the Federal Reserve Bank of his district. Dealings in trade acceptances and their use are highly encouraged by the Federal Reserve Board as well as by the various Federal Reserve Banks, and preferential rates are granted for their rediscount. Trade acceptances have been taken from the mass of general commercial paper and have been placed in a class by themselves. Their credit standing is much higher than other forms of commercial paper, and they command a better rate of discount than single name commercial paper. The margin of profit in the process of rediscounting trade acceptances is to the advantage of the banker also, for he is enabled, generally, to take advantage of the leeway in rediscount rates which are generally a fraction of a percent lower than the discount rate charged by the bank to the customers.

The creation and development of discount companies in the United States is progressing at a rapid rate, and the time is doubtlessly not far distant when these discount companies will be able to render a very important service to banks and bankers. Discount companies prefer trade acceptances to single name paper and would much sooner purchase them from bankers than they would any other class of commercial credit instruments. Such discount companies would also doubtlessly offer more favorable rediscount terms than the Federal Reserve Banks, being especially organized for the particular purpose of commercial paper and acceptance dealings.

Limitations As To Discount Of Commercial Paper For Any One Party Not Applicable To Trade Acceptances

Banks are generally restricted from lending to any one individual, person, firm or corporation in an amount in excess of ten percent of their capital and surplus, either upon promissory notes or single name paper, even when such security is of the best sort. This has proven to be a wise legal provision and has prevented many over-extensions of credit.

However, there have been occasional instances where people who have been entirely worthy of additional credit for seasonal requirements, have been unable to obtain the same from their bank, and consequently, the bank in some cases has lost a good part of the business of one of its most valuable customers.

The above restrictions are not imposed upon banks in the discount of trade acceptances. The bank, therefore, may discount for its customers their acceptances in excess of the ten percent limit. Customers, the credit of which are good, may then be taken care of by the bank in the proper way.