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REPORT
OF
FEDERAL KESEHVE COffl.'IITTEE ON ACCEPTANCE PRACTICE

November 6f 1936,




CONTENTS

Terms of Reference
typical Criticism of Acceptance Practice
Membership of the Committee
Formulation of Method of Analysis
Questionnaire of Senate Committee
A Statistical Analysis
Distribution of Questionnaires Through Federal Reserve Banks
Assembly of Replies to Questionnaires
Replies to Questionnaires
Reporting Institutions
Bills in Difficulty, 1920*1932
Indicated Losses-91920-1932
Large Individual Losses
Losses by Years
Experience, 1925-1932
Difficulties Compared with Volume Outstanding
Long Maturities, Renewalsf 8«rolvin& Credits
Goods Released on Trust Receipts
Losses by Underlying Commodities
Losses and Banking Judgment
American Acceptance Credits under Standstill Agreements
Losses Incurred in Standstill Liquidation
Character of Acceptances Subject to Standstill Agreements
Acceptors1 Recommendations for Changes in Rules of Procedure
More Restrictive Requirements
Suggestions for Liberalizations
General Suggestions
Conclusions
Recommendations




1
2
3
3
4
5
8
9
10
11
12
12
13
16
17
19
21
22
22
24
24
25
26
29
29
31
32
33
37

REPORT OF THE FEDERAL RESERVE SYSTEM COMMITTEE
ON ACCEPTANCE PRACTICE *
During the spring of 1932 a committee of the Federal Reserve System began,,
a study of phases of acceptance practice which had grown up under the Federal
Reserve Act.

The project was initiated by a letter of May 6, 1932, from Mr. Eugene

Meyer, then Governor of the Federal Reserve Board, to Kr. J. U. Calkins, Chairman
of the Governors Conference of the Federal Reserve System. Bie completion of this
report has been delayed in order that a review might be made of the experience of
American acceptors in connection with the standstill arrangements made with central
European countries in 1931*

It was not until the end of 1935 that the final results

of this experience were becoming sufficiently obvious to make possible an assessment
of it. A summary of the standstill experience appears hereafter in this report but
a more complete and detailed analysis has been prepared and is attached herewith
as a supplementary report.
Terms of Reference. - Mr. Meyer's letter, referred to above, was as
follows:
"Certain phases of the acceptance practice which has grown up
under the Federal Reserve Act have been made the subject of coanment in
recent years and occasionally of criticism. The report which was submitted on behalf of the Committee on Banking and Currency of the Senate,
regarding S, 4412, devotes a paragraph to fThe Growth of Acceptance
Credit,1 which contains a number of such criticisms. The Board feels
that certain of these criticisms may have pertinency and that it would
be helpful to make a thorough and discriminating study of American acceptance practice and its development, particularly as influenced by
the more liberal attitude adopted by the Federal Reserve System in
recent years and reflected both in the rulings and regulations of the
Federal Reserve Board and in the operating practices of the Federal
reserve banks. The Board, therefore, suggests that a committee be set
up to begin an investigation at an appropriate time along the lines
indicated and to make recommendations for such correction of procedure
and/or revision of the Board's rulings and regulations, as may be found
to be necessary or desirable* Such a committee might be either a
ccranittee of the Federal reserve banks alone or a joint committee representing both the banks and the Board. It would be appreciated if you
would consider this matter and let the Board have the benefit of your
suggestions, made after consultation with the Governors of other Federal
reserve banks if you prefer, including your views as to the personnel
of such a committee, so far as it involves representation of the Federal
reserve banks.*



Typical Criticism of Acceptance Practice, * The paragraphs on "The Growth
•
of Acceptance Credit11 contained in the report of the Committee on Banking and
Currency of the Senate on S. 4412, referred to in Governor Meyerfs letter, were as
follows:
"The Growth of Acceptance Credit11
"The general ease and accessibility of credit under the
regime which existed prior to 1929 was accentuated by the issue of the
instrument known as the bankers* acceptance. In its original purpose
this form of lending was intended to include only unquestionably liquid
obligations, growing out of the actual sale of goods in foreign trade,
so that the acceptance became a short-tem claim payable in international
funds, usually gold. It was this conception of the instrument which was
originally adopted in the Federal reserve act, and on which the use of
the instrument by the Federal reserve system was founded. Later amendments to the reserve act, adopted during the World War, broadened the
use of the acceptance and opened the door to the application of a conception of its use which was practically that of a finance bill—a bill
drawn without reference to the immediately liquid character of a given
I transaction, and primarily based upon the general power of the parties
I to it to see that it was liquidated from some source. The use of the acceptance to supply what was called dollar exchange, although doubtless
of advantage under proper restrictions, undoubtedly opened a door to
grave abuses, which were in some measure responsible for the credit difficulties that later made their appearance in South American finance*
Hiese difficulties, however, were after all comparatively minor, the
real dangers of the acceptance being exhibited in connection with the
stretching of the definition of various transactions so as, for instance,
to include storage of commodities as an incident to their moving abroad
or moving from one market to another so that acceptances protected by
such stored goods were regarded as acceptances made against goods
actually moving in international trade. Xt was easy to pass from this
view of the situation to another and more advanced view, wherein stored
goods not sold during the period of the acceptance were used as goods
properly providing a basis for renewal of the acceptance so that revolving acceptances or acceptances growing out of revolving credits became
common, notwithstanding official warnings against them*
"From the domestic standpoint, it would seem clear that not a
few banks had fallen into the habit of supplying their customers with
funds through the issue and sale of their acceptances, without much regard to the question whether such acceptances were called for or not.
That the large amount of reserve credit thus created prevented effective
control of security loans and investments of the banks, and thus fostered
the stock market boom, there can be little doubt.
"Through these and similar means, too f a very large commitment
on the part of American banks taken on behalf of foreign banks came into
existence. Germany, in particular, proved to be a great borrower on this
score, and the total of acceptances made directly or indirectly in order
to provide funds for foreign baaks grew to unprecedented amounts. The
effect of these transactions upon the German banks themselves, in leading



up to the German financial collapse of July, 1931, has been carefully
traced by the international committee of bankers which met under the
chairmanship of Mr. A. H. Wiggin in Basle, after the breakdown of
Germany during the past summer, for the purpose of discussing ways and
means of dealing with the German credit situation*fl
Membership of the Committee. - In line with Governor Meyer f s letter the
Committee appointed included Mr, E. R. Kenzel, Chairman, Mr* C* R* McKay, and
Mr. Ira Clerk, Deputy Governors respectively of the Federal Reserve Banks of New
York, Chicago, and San Francisco*

It was determined by the Federal Reserve Board

that its representation on the Committee should be through its senior staff, and
Mr* W. W. Riefler, of the Division of Research and Statistics of the Federal Reserve
Board, was detailed to assist in the formulation of the procedure for collecting and
analyzing information regarding acceptance practice as it has grown up under the
Federal Reserve Act* Mr. Riefler was succeeded in this assignment by Mr* C. W*
Blattner of the same division*
At the time the material collected by your Committee was being organized
for this report, the untimely death of its chairman occurred, and on October 14,
1933, Mr* W. Randolph Burgess, Deputy Governor of the Federal Reserve Bank of
New York, was appointed to the chairmanship of the Committee*

Mr* C« R. McKay

retired from the Committee in September, 1936, simultaneously with his resignation
from the Federal Reserve Bank of Chicago. But before his retirement he reviewed a
draft of this report and gave the Committee the benefit of his suggestions*

The

report has also been submitted to, and comments have been received from, the other
members of the subcommittee of the general committee on bankers acceptances,
Mr. W. W. Paddock, first vice president of the Federal Reserve Bank of Boston, and
Mr. F. J, Zurlinden, first vice president of the Federal Reserve Bank of Cleveland.
Formulation of Method of Analysis. - It was apparent at the outset that
acceptance practice as it has grown up under the Federal Reserve Act has several
different aspects. One of these is the soundness and safety of the business of accepting institutions as it has developed under the influence of the regulations
of the Board with respect to the technical eligibility of bills for acceptance by



member banks and the eligibility of accepted bills for purchase or discount by
Federal reserve banks. Another aspect relates broadly to the development of the
acceptance market and the influence of the Federal Reserve System in that development. Features of this aspect include such matters as the development of the prime
accepting names in the central markets, the breadth of the market for acceptances,
the rate policy pursued by the Federal Beserve System in taking open-market offerings of acceptances, the effect of the operations of the Federal reserve banks in
acting as agent for foreign purchasers in acquiring American acceptances for investment, and other related matters.
Questionnaire of Senate Committee. - During the course of the investigations conducted by the Committee on Banking and Currency of the Senate in drafting
the legislation rtaich ultimately was enacted as the Banking Act of 193?, a questionnaire dealing with acceptance practice was directed to all Federal reserve banks,
the result of which is included as an appendix, Part VI, of the published hearings
held by the Senate Committee, The questionnaire contained 33 questions, most of
which related to the second broad problem of acceptance practice, having to do more
with the effect of Federal Reserve System policy on the development of the market
for acceptances and less to do with unsound practices of acceptors growing out of
technical regulations of eligibility.

In sending out its questionnaire, the in-

vestigators for the Senate Committee used the following preface:
"Federal reserve officials have called attention to the fact
that, at times, the dependence of the acceptance market on the
reserve banks has interfered with the credit policies in force at the
moment. Ihe purpose of these questions is to inquire into the nature
of and the extent of the dependence of the acceptance market on the
reserve banks and the relationship between the volume of acceptance
purchases by the reserve banks and the expansion and contraction of
credit.n
Your Committee considered the material compiled for the use of the Senate
Commit tiee, and concluded that the most productive and most fundamental approach
to the whole problem would be to explore the experience of accepting institutions




with respect to the soundness and safety of their accepting business as it has
developed under the influence of the regulations of the Board.
A Statistical Analysis, - Your Committee took under consideration various
plans for approaching t&ip problem and consulted with leading acceptors.

As a

|result, a statistical project was planned "to obtain data regarding acceptance

\

[practices for the purpose of formulating recommendations for changes in the law or

\

[the Boardfs regulations if such changes are shown by the dbudy to be desirable*H

/

Biis project was addressed to the first of the broad problems of acceptance practice/
described above, and the results of this limited investigation form the subject
matter of the present report and its recommendations.
In general, the plan for approaching the problem of acceptance practice,
that is the soundness of the business conducted by acceptors, entailed requesting
each organization which had been an important acceptor in the past decade for detailed infoimation with respect to every credit "on which the bank's customer failed \.
promptly to meet obligation to plaice the accepting bank in possession of funds to
pay the acceptance*n ISeven different styles of schedules were contrived, one for

I
/

each of the following classes of credits:
I.
/ II.
' III.
IV.

Import credit
Export credit
Domestic shipment credit
Credit covering shipments between
foreign countries
V. Domestic storage credit
VI. Foreign storage credit

VII*

Dollar exchange credit

Uiere is bound following this page as an exhibit the questionnaire used with respect
to import credits. A similar body of information was requested with respect to
credits falling in the other six classifications. These seven classifications, in
which >acceptances are naturally grouped on the basis of the style of underlying transaction, were suggested by the development of the law and regulations and are recognized
in the main by the statistics currently compiled by the American Acceptance Council*
The Council, however, in reporting acceptances outstanding from time to time includes



in one grouping shipment between or storage in foreign countries.

F.R.D. No.
Serial No.
1.

Import Credit

Data regarding import acceptance credit on which the bank's
customer failed promptly to meet obligation to place the
accepting bank in possession of funds to pay the acceptance.
A. Name of Accepting Bank
Address
Federal reserve district
B.

Amount of bill or bills:

C*

Terms of bill or bills:
1. Date drawn:

2, Usance:

3. Date accepted:

4.

Date of maturity:

2*

Country of origin:

D. Underlying transaction:
1.

Commodity:

3. Date of shipment:
4*

Was it drawn after the physical import of the commodity was completed?

5. Did you receive shipping documents?
6.

If not, what other evidence did you receive of a bona fide import?
(Please specify)

7. Was the credit secured?
8. What was the security?
9. Was the term of the bill based upon the period usually required for
shipment or on the usual credit terms obtaining in the trade concerned?
(Please specify)
10*

Was it a renewal bill?

11. Was the taker of credit the importer?
12*
E.

If not, what was the relation of the taker of credit to the goods?

Disposition of the goods:
1. What disposition was made of the goods?
2.

F#

Did you release them on trust receipts?

How was the credit opened under which the bill was drawn?
1. Wa£ it negotiated at your head office, through a branch, representative,
correspondent bank or other agent? (Please specify)
2.

Was it a letter of credit or acceptance agreement?

3.

Did it ^over this one import only or was it a revolving, general or
syndicate credit? (Please specify)

4.

Please state briefly any other pertinent details showing the general
type of the credit:




(Please specify)

7
1. Import Credit (continued)
0. What was your experience with this bill after its maturity?
1. Was renewal granted?
2. Was the credit eventually paid?
3. Did you absorb a loss?

If so, how much?

4. Or is,the matter still in suspense?
REMARKS:




Please describe any additional facts or circumstances which are
necessary to give a clear picture of the transaction and the
reasons why the customer failed to place you iru funds to meet
the bill at maturity;

.8
Distribution of Questionnaires Through Federal Reserve Banks» - Under
date of December 8, 1932t a letter signed by the chairman was directed by your
Committee to the Governor of each Federal reserve bank, transmitting a supply of
the questionnaires to be distributed among important accepting institutions*

The

letter stated:
"With regard to the study of the development of the acceptance business in this country to be undertaken by a committee of the
Governors1 Conference in conjunction with the Federal Reserve Board,
as reported to and discussed at the recent Governorsf Conference, I
have pleasure in outlining the method of procedure adopted by the
committee in conference with our friends at Washington.
"It was believed that the most desirable machinery for collecting data and information would be the Federal reserve banks whose
dlose contacts with the accepting institutions in their respective
districts would result in more frank discussions of their individual
problems, and that the respective reserve banks would be more effective
each in its own district in gathering the worth while views on the
larger and more general subjects of the study than any other agency.
"Accordingly, two forms of letters have been prepared which
it is proposed to ask the governors of the several reserve banks to
address to institutions in their districts which are or have been
actively interested in granting bankers1 acceptance credit. You will
note, from the drafts of these letters which I enclose herewith, that
from the active and also inactive acceptors we asked first for a statement of their views in the light of their experience as accepting
bankers as to desirable changes either in the law or in the regulations,
and that they give reasons, examples and their experiences upon which
they based their views and recommendations." . • .
"As to the banks to be addressed by .either form of letter, a
preliminary study of the billa boilght l y the New York bank for System
?
account during the past 18 years revealed that there had been many
changes in the names appearing in the New York market. These changes
resulted largely from consolidations and liquidations; also, some
names which in past years appeared either frequently or in relatively
considerable volume have not been seen in recent years. Ae a result
of that study the enclosed list of accepting institutions in your district
was prepared as possible subjects for inquiry, but the committee realizes
tHat you are in much better position than any other body to judge in that
regard and so please consider this list of acceptors in your district
merely as suggestions on the part of the committee whose general view has
been that probably more satisfactory results could be obtained by a
general limitation of inquiries to institutions either important as.acceptors or for the views of whose officers you would have a high regard."




9
The letter which was proposed by the Committee for the use of the
Governors in addressing active accepting institutions in their respective districts
stated that in reviewing the experience of American institutions in granting acceptance credits
n

m *
it would be helpful to the Federal reserve banks and
the Federal Reserve Board to have certain data and to draw upon the
experience of accepting bankers for suggestions as to desirable changes
either in the law or in the regulations*
"Therefore, it will be appreciated if you will
ff

(a) state your views on this subject
and give reasons and examples in support of any
changes which in the light of your experience
you think should be made in either the law or
the regulations.
f
l

(b) indicate the extent to which each
of the different categories of your acceptance
business may have been affected in recent years
by foreign monetary disturbances, and other difficulties you may have experienced by reason of
laws of foreign countries•
ff

In addition to the above general comments it is desired for
the purpose of this study also to collect data relating to individual
acceptance credits which for one reason or another have resulted in
losses or otherwise proved unsatisfactory* We are therefore enclosing
various specimen forms showing the information desired from you regarding such credits. It is not desired, however, that these reports be
filled out for credits where the only difficulty was a slight delay in
receipt of remittance, or for credits the maturities of which have been
prolonged solely because of standstill or other similar country-wide
restrictions. But in such cases it would be helpful for the purpose of
this study if total figures for all credits coming within such restrictions might be furnished."
The letter directed to institutions which had become less active as acceptors, or had ceased to accept, was substantially the same as the letter addressed
to active acceptors except that the inactive ones were asked to outline the experience which led them to curtail their acceptance activities,
Assembly of Beplies to Questionnaires. - During the early part of 1933
the replies of the accepting banks were assembled, although "there were delays associated with the strenuous duties demanded of bankers of all sorts during these
|months. Thus, this report does not include experience with any credits originating
subsequent to 1932.



10
On April 19 and October 10, 1933, your Committee made interim reports to
the Governors

Conferences while the material made available by the questionnaires

was being analyzed.

The second report stated:

"The replies received since the last Governors Conference
do not differ materially from the earlier replies and confirm the
opinion already held by the majority of those who have been in closest
touch with the development of the acceptance practice in this country
fthat on the ^hole the experience of accepting banks has been unusually
I satisfactory and that the existing law and regulations gOYf»1™iTig thjf
[granting of acceptance credits are agitable for the proper conduct9f
I the acceptance business," The facts brought out in this survey would
appear to indicate that in general, errors of credit judgment, falling
prices and reduced business morality, which is always evident in
periods of economic disorder, were responsible for the great majority
of losses and unsatisfactory experience incurred by accepting banks
rather than any defect in existing law or regulations. Suggestions and
comments are still chiefly confined to three categories:
1. That with regard to financing movements of
goods between foreign countries the basis should be more
clearly defined to the end that accepting
pg
^
g
p

ie
qe

ana be assured of a reasonable expectation that the underlying transaction wnniri pynflucft tTtft fniula to retire tMII
b i l l s at their maturity*
2» d a t the lqw and regulations *»* t
•* ?
shipments are too T^aiA and should be fgpendftd t o permit

acceptances to be made against the domestic shipments of
e ° o d s under straight bills of lading or other shipping
documents not necessarily conveying security title.
3, Some criticism of the functioning of the
discount market and alleged diq^inrinnfrirm 1a thrt rnnrlrot
^*|?n^it\|tiQT>& located both in the
interior and in Hew York City#ft
Owing to the press of other matters following the banking holiday, and the
desire to include as complete a study of experience with the so-called standstill
agreements as was possible, the preparation of your Committeefs final report has been
delayed until now. This delay served an additionally useful purpose since it has
permitted the completion of the study of a number of important cases, final settlement of which was still in suspense at the time the original questionnaires were submitted in 1933.
Replies to Questionnaires. - The various Federal reserve banks requested
reports on questionnaires from 170 accepting institutions, distributed among



11
Federal reserve districts as follows:
District 1

2
3
4
5
6

District

17
41
9
13
14

7

8
9
10
11
12

15
All districts

11
6
5
13
8
18

170

Besponses were received from 156 banks in all, although 116 banks did not
fill out any questionnaires since they had encountered no unfavorable experience.
One or more unsatisfactory credits were reported by each of 40 institutions, 31 being
i member banks. Actual losses were reported by only 24 banks. In all, 188 cases of
f
credits upon which some difficulty was experienced were reported.

These cases of

unsatisfactory experience were distributed among Federal reserve districts according
to the location of the accepting institution as follows:
District 1
2
3
4
5
6

7

27 S

8
9
10

District
135 ^
1
1
0
0

0
0
0
0
6

11
12

All districts 188
Reporting Institutions. - Among the 156 institutions which responded to
the Committee's questionnaires were practically all of those i&ich the American
Acceptance Council reports as accounting for upwards of 90 per cent of the current
acceptance business. There were, however, many important acceptors in earlier years,
whose names no longer appear on the list.

In nearly all instances such institutions

were merged with others and the consolidated institution continues to be a leading
acceptor and one which responded to the Committeefs questionnaire. Your Committee
took steps to discover whether existing acceptors accounted for the unfavorable experience suffered by institutions absorbed by them.

While every instance of an un-

satisfactory credit experienced by a merged institution was not reported to the
Committee, investigations would indicate that most of the important ones were. Your
Committee feels that the returns in hand are as complete in this respect for all



12
practical purposes as they need be and that the inclusion of such experiences as may
have been omitted would merely emphasize the facts revealed by the responses
, received.
Bills in Difficulty, 1920-1932. - She questionnaires returned by acceptors
indicated an aggregate of $38,300,000 of bills accepted during 1920-1932 fton which
the bank f s customer failed promptly to meet the obligation to place the accepting
bank in possession of funds to pay the acceptance."

Acceptances associated with

standstill agreements were not included, as accepting institutions had been told that
"it is not desired, however, that these reports be filled out for credits where the
only difficulty was a slight delay in receipt of remittance or for credits the
maturities of which have been prolonged solely because of standstill or other
similar country-wide restrictions.11
No acceptance was reported as having been in difficulty prior to 1920.
Indicated Losses, 1920-1932. - In connection with the aggregate of the
$38,300,000 of bills with respect to which the bank customer failed promptly to
meet the full obligation, collections through August 1935 had amounted to $23,300,000;
an aggregate of $4,700,000 was still in suspense; and losses had been written off to
!the extent of $10,300,000.

These figures, of course, do not include losses in-

curred by .American acceptors in connection with bills included in standstill arrangements with central European countries. This experience will be referred to separately in the latter part of this report and reviewed in detail in the attached
supplementary report.
The volume of losses of $10,300,000 does not appear large when compared
with the aggregate acceptance business done during the years 1920-1932, which has
been estimated at $50,000,000,000.

The indicated losses, therefore, have been

slightly over .02 of 1 per cent of the total acceptance business done during the
years 1920-1932; losses plus amounts still in suspense, less thanJD4 of 1 per cent.

I

Commission received by the accepting banks for their undertakings, aggregated at
least $125,000,000 on the basis of a charge of 1/4 of 1# for 90 day credits.




13
Since the primary purpose of this survey was to ascertain from actual
experience what change if any should be made in existing law, regulations, or
practice in order to correct any evident weakness which may exist in the business

I

of extending acceptance credits, an accurate analysis should be based on the types,
of transactions which led to

1 i n T°^f d *

fliff*cu^^

**}£,

^

^

^

Obviously in following the letter course a single transaction involving

a very substantial sum might appear to outweigh several other types of transactions
aggregating a smaller dollar value.
be the better basis for analysis*

Accordingly the former method would appear to
Unfortunately, however, the replies from report-

ing banks show only those transactions ?*iich resulted in difficulty or loss and
there is no way of ascertaining the actual number of transactions of corresponding
type which were consummated satisfactorily.

As a consequence this survey can

indicate only the relationship of the individual types of unsatisfactory credit to
the total number of cases involving difficulty or loss.
Large Individual Losses. - Although there were 186 cases of credits in
some kind of difficulty from 1920-1932, 92 cases contributed the total losses of
$10,300,000.

The number of cases involved is shown by classes of credits in

Ifcble 1Table 1 - Number of Cases of Acceptance Credits Involving Difficulties
and Losses by Class of Credit 1920-1932




Class of Credit

Number of
. credits in difficulty

Total

Involving
losses

Import
Erport

75
19

36 - f£ k

Domestic shipment
Domestic storage

2
28

1
13

Shipment between
foreign countries
Foreign storage

49
10

2 - ^0
4

12 . j - <\
-j

5

Dollar exchange

_S

J.

•total

188

92

V

14
The extent to which the aggregate losses were contributed by a few large
cases is striking.

For example, losses of $1,221,000 associated with acceptances

executed under import credits during the years 1925-1932 grew out of 25 cases in
all, but 4 cases contributed $827,000 of losses.
In connection with acceptances executed during 1925-1932 involving shipments between foreign countries, $3,101,000 of losses were recorded, associated
with 24 cases, but 4 cases contributed losses of $1,953,000. These 8 large cases

I

may be briefly described to serve the purpose of illustrating typical situations:
Import Credits
Amount
$

Date
accepted

225,432.02 1928

Transaction

Experiences

Shellac from
Far East

Loss #181,865.33
Balance paid

5,00a,000.00 1932-1933 Raw silk from Loss $250,000
Collected $4,688,000
Japan
Suspense $ 62,000
(Latter being reduced by regular
payments and believed to be safe.)

830,035.66 Sept.-Nov. Dried peas
1930
from Mexico

593,564.54 1928

Copra from
Philippine
Islands &
Dutch East
Indies

Customer went bankrupt.
Covers period from 19251935. Irregular use of
credit by taker in the
early days resulted in a
loss to the bank, which
continued to carry the
account in an effort to
reduce the deficit, but
price decline in 1932
forced a write-off of
$250,000.

$155,000 written
off as a loss.
Collected $673,000
Suspense $ 2,000

Drop in market value of
merchandise, and of
securities pledged as
collateral.

Loss of $241,670.58
Balance paid

Takers of credit got into
difficulties,making it
necessary for bank to
take over the manufacture
and sales of merchandise.
Liens placed by others on
some of the merchandise
forced liquidation,thereby enhancing bankfs loss.

Shipments between Foreign Countries
503,500.00 May 1926 Lumber from
$302,925.36 Loss
Czechoslovakia Balance paid
and Roumania
to various

countries.


Remarks

Customer failfcd.

15
Shipments between Foreign Countries (contfd)
Date
accepted

Amount
*

Transaction

Remarks

Experiences

Customer f a i l e d .

913,655.17 Aug. 1931 Merchandise from Loss $439,000
various European Balance still in
countries to
suspense; receivother foreign
ing recoveries,
countries.

Evidence of misrepresent at ion.

1,659,308.82 April 1938 Iferchandise from Loss $900,000
various foreign
Balance s t i l l
countries to var- in suspense,
ious other
foreign countries.
468,211.86 1931

Merchandise from Collected # 52,784*09 Evidence of misvarious foreign
Loss
312,195.93 representation.
countries to var- Suspense
103,231.84
ious other
foreign countries.

Table 2 shows the distribution of difficulty and losses among seven
classes of acceptance credits.
Table 2 - Aggregates of B i l l s Accepted in 1920-1932 in Difficulty, by
Class of Credit - Subsequent Collections, Losses, and Items in Suspense
Through August 1935

Type of credit
Import
Export

Total in
difficulty

Subsequent
losses
collections
written off
(000 Omitted)

In
suspense

• 4,056 lt*%"fl
908 7?rW-

• 607

•16,493
3,693

•11,830
3,103

Domestic shipment
Domestic storage

303
3,630

151
3,541

Shipment between
foreign countries
Foreign storage

9,457
3,817

3,313
3,517

Dollar exchange

1,058

963

44

53

$38,340

•33,317

•lO^l

•4,683

Total

50
810
3,336 "^ if
1,147 2)0 f

681
3
369
2,918
153

On the basis of the figures shown in Table 2 , i t would appear that exY^erienco has been least satisfactory among import credits.



The aggregate of b i l l s

16

in difficulty in this class was larger than in the case of any other and losses
written off were larger.

By these tests transactions involving shipments between

foreign countries afforded the next most unsatisfactory experience.

In this form

the figures are inconclusive, however, since the amount of difficulty encountered in
each class of credit needs to be related to the aggregate business dene in the
category during those years* An effort to do this is the subject of some subsequent paragraphs*
It is possible that actual losses suffered by acceptors may be higher
than TOuld appear from those reported, as a substantial part of the #4,700,000 now
being held in suspense has been outstanding for at least three years.

Conservative

accounting might well have written off some of this aggregate as a loss before now,
although reports indicate that a substantial portion of this suspense will probably
be recovered eventually*
Losses by Years. - Acceptance difficulties leading to losses were greatest
in years of business recession and price decline, such as 1920, 1921, 1924, 1931, and
1932#

It will be recalled that this survey did not include any business originating

after 1932,

Table 3 shows the losses by the years when the relative b i l l s were

accepted*
Table 3 - Losses Written Off on Bills Accepted in Each Year 1920-1932
by Class of Acceptance Credit

Bnport

Year

Date not
furnished
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932

All years



$

Shipments
)omestic Domestic between Foreign
Export shipment storage foreign
storage
countries
(000 Omitted)

200
1,843

* -

—
—
792
5
10
12
465
88
311
80
250
$4,056

$

90

393

$ -

475

414
177

133

225

Dollar
exchange

44

37

mm

10
150
12

50

5
100
74

20
493
$908

303

3

$50

$810

261

-

~18

-

$1,147

$44

30

28

1,834
906
$3,326

Total

818
2,257
786
962
5
373
423
482
218
433
2,428
1.156
$10,341

17
Experience, 1925~1932« - In several respects there is a natural division
of acceptance experience as between the years ending with 1924 and those beginning
with the year 1925*

A large increase in the acceptance business as a w h d e began

after 1924, and acceptance practice at some points was improved as a result of
lessons learned from unsatisfactory experiences of earlier years* Business in some
of the major classes of acceptances, moreover, amounted to little prior to 1925.
Chart 1 shows the volume of acceptances outstanding by classes at the end
of each month for all available months.

Separate figures were not published by the

American Acceptance Council for the two classifications "shipment between foreign
countries" and wstorage in foreign countries.11
The chart brings out the fact that import credit transactions had existed
in large volume prior to 1925.

On the other hand, transactions involving Shipments

between or storage in foreign countries were negligible in size in 1925 and 1926,
began to increase rapidly in 1927, and by the latter part of 1929 exceeded import
credit transactions.

Acceptances outstanding in the class of foreign storage and

shipment at the end of the year 1930 amounted to more than $550,000,000, while import acceptances outstanding were but slightly more than #200,000,000. (The rapid
increase following 1927 in acceptances outstanding to finance shipments between or
storage in foreign countries reflects in part revision by the Federal Reserve Board
Of its ruling tO peypit theftf»<»P,p*gmr>P.nf M l In in

goods had actually arrived at their destination.

Skis broadening of ruling follx>wed\

some recession in trade in 1924 and in 1927* and was particularly designed to assist
furthering our exports of cotton and other raw products.
Table 4 shows by class of credits the experience with respect to difficulties on bills accepted in the years 1925-1932-




18

BANKERS ACCEPTANCES OUTSTANDING BY TYPE OF TRANSACTION
MILLIONS Of DOLLARS

MILLIONS OF DOLLARS

( End of month figures )

600

600

500

500

400

400

300

300

200

200

100

100




1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

19

4 - Aggregate of Bills Accepted in 1925-1932 in Difficulty by
ss of Credits - Subsequent Collections, losses and Items in Suspense
Through August 1935

Class of credit

Total in
difficulty..

Subsequent
collections^ .

Losses
written off

In
suspense

... f{000 Omitted)

Import
Export

*

557
681

$ 8,889
2,694

$ 7 > 111
1*305

$1,221
708

Domestic shipment
Domestic storage

203
1,840

151
1,412

50
182

2
246

Shipment between
foreign countries
foreign storage

8,872
2,933

2,853
2,501

3,101
279

2,918
153

674

622

$26,105

$15,955

Dollar exchange
Total

... 52
$5,541

$4,609

!Hie table brings out the fact that ?uhen acceptance experience after 1924
i s viewed separately the unsatisfactory experience in the import credit classification based solely on dollar amounts involved no longer overshadows that in some other
classes.

Total acceptances in difficulty in the import credit class amounted to

#8,889,000 on which losses of #1,221,000 were written off while #559,000 of b i l l s
were s t i l l in suspense.

Among credits involving shipments between foreign

countries, total acceptances in difficulty amounted to #8,872,000 on which losses
of #3,101,000 were written off while #2,918,000 of b i l l s were in suspense*
Difficulties Compared with Volume Outstanding* - The bare aggregates of
difficulties give no indication of their relative significance in the various
classes, but should be related to the volume of acceptances ufaich have been negotiated in the various classes during the period.




20

The volume of acceptances in the various classes executed.in each year
during 1925-1932 has been estimated by multiplying the average out standings by 4
since the acceptance business turns over roughly every 90 days*

The following

tabulation shows the estimated volume of acceptances negotiated.
Table 5 - Estimated Volume of Acceptances Negotiated during 1925-1938
by Class of Credits
Class of Credit
Import
Export

19S5

1936

1927

1929
1930
1931 1932
1928
(Millions of dollars)

$1,123 $1,186 $1*204 $1,283 $1,355 $1,105 § 762 $
1,025
941 1,189 1,572 1,688 1,668 1,286

Total

405 $ 8,423
705 10,074

99
425

78
344

84
524

72
559

71
604

100
825

115
902

66
848

685
5,031

Shipment between and
storage in foreign
countries

47

140

291

692

1 ,249

1,956

1 ,732

1 ,048

7,155

Dollar exchange

67

74

101

115

224

229

217

62

1,089

Domestic shipment
Domestic storage

Ototal

$2 ,786 $2,763 $3 ,393 $4 ,293 $5 ,191 !(5,883 $5 ,014 $ 3 ,134 $32,457

When the aggregate losses suffered by classes of bills drawn during the
period 1925-1932 are compared with the volume of acceptances negotiated, it would
appear that relative losses were more significant among credits involving shipment

I

between and storage in foreign countries thgn in the other classes* Losses plus
items still in suspense were four times as much as those among import credits* As

previously noted these figures do not include credits covered by standstill agree-

ments which will be referred to later* Too much weight should not be given to this
comparison based on dollar amounts, as the credits based on shipments between and
storage in foreign countries on which losses were taken happen to include a number
of large transactions. (See Table 1)




21
Table 6 shows the difficulties per $100 of b i l l s negotiated during
1925-1932.

Table 6 - Aggregate of Bills Accepted in 1925-1932 in Difficulty
per $100 of Estimated Total of Bills Accepted in 1925-1932
by Classes of Credits
Losses plus
suspense

Total in
difficulty

Losses
written off

$0,106
.027

$0,014
.007

$0,007
.007

$0,021
.014

Domestic shipment
Domestic storage

.029
.037

.007
.003

.005

.007
.008

Shipment between
foreign countries
and storage in
foreign countries

.165

.047

.043

.09

Dollar exchange

•062

.005

.005

All classes

.426

.067

.145

Class of Credit
Import
Export

.078

In
suspense

It would appear from the analysis made by your Committee that in some of
the acceptance business acceptors have not shown a high degree of vigilance in assuring themselves that their business was carrying a minimum amount of risk. For
example, there were losses of $3,326,000 suffered in credits involving shipments
between foreign countries.

With respect to practically all of the bills the ac-

ceptor was unable to furnish information as to irtiat disposition was made of the
goods against lAich the credit was drawn.

With respect to a quarter of the aggre-

gatef the acceptors had never seen documentary evidence that any goods had been
shipped but had relied upon the statements of correspondents or others.
long Maturities, Renewals, Revolving Credits. - In allt there were 92
oredits on uahich losses were incurred.

In 16 cases* these involved bills with

maturities in excess of 90 days, while there were 20 cases of renewal bills and
22 cases of revolving credits.

Biere were cases nhere two or three of these con-

ditions were characteristic of one particular credit, but in all there were 49 separate credits which were characterized by one or more of these conditions.



22

Out of $10,341,000 of losses, $6,260,000 were on credits which involved
one or more of these characteristics, although i t is impossible to deteimine how
much of this loss was due to these factors and how much coincidental*
Goods Released on Trust Receipts* - Half of the $4*056,000 of losses incurred on import credits were in connection with transactions in which the goods
were released on trust receipt•

Losses in the other classes of credits were not

associated with trust receipt transactions*
Losses by Underlying Cbimnoditjies* - Sugar credits were responsible for
$2,500,000 of the aggregate losses of $10,300,000*

Credits on peanuts and peanut

o i l contributed losses of $644,000 and coffee credits, $568,000*

!he losses on

sugar occurred largely in connection with import credits, though a sizable loss
occurred in foreign storage transactions*

There were important losses in transac-

tions involving shipment between or storage in foreign countries in credits on
sugar, coffee, lumber, and tobacco, in importance in the order mentioned.
Losses by underlying commodities and class of transaction are shown in
some detail in Table 7*




23
Table 7 - Losses on Bills Accepted in 1920-1932 by Underlying Commodity
end Class of Credit

Commodity

Seaport

Shipment
between
Export Daneetic DctDeetic foreign Foreign Dollar
shipment storage countries storage Bxchange
(000 Omitted)

Sugar
$1,635
peanuts &
peanut o i l
644
Coffee
30
Purs
149
Lumber &
timber
Tobacco
42
General
merchandise
Railway
equipment
Skins & hides
260
Silk
257
Wool
48
Copra
242
Metals
Hardware &
industrial
machinery
Shellac
182
Wood o i l
200
Woolen yarn
Dried peas &
beans
162
Wheat & grain
Shoes
Packing house
products
Groceries
Paper
73
Autos & motors
Cotton
Burlap
48
Spices
Rubber
Oil

Miscellaneous

84

Dollar exchange

-

Total




#4,056

# -

• -

•#•

#

-

% 885

3
278

-

50
«i

200
•

22
-

mm

293

281

-

281
260
257
262
242
229

-

mm

-

-

•

214
mm

5

-

-

-

-

-

-

-

mm

200

—

-

-

200
172

mm

182
172

~

-

105
-

46
37
-

mm

mm

#50

mm

-

•

•

—

m»

«•

mm

mm

mm

—*

-

mm

mm

mm

mm

mm

mm

mm

mm

m,

-

-

77
27

—

—

34
•

#908

383
304

262
92

88
49

644
568
427

333
mm

mm

90

$ 8,543

535

201
224

%•

$ 23

-

TotaO.

—

m»

mm

mm

20

1,888

88
77
73
69
49
48
46
37
34

1,972
44

mm

#810

162
105
90

#3,326

#1,147

44

#44

$10,341

24
Losses and Banking Judgment» - Of the aggregate losses revealed by the
analysis made by your Cotnmittee a large proportion was incurred by a few institution^
five accounting for 64# and ten for 83$ of all losses.

It is true that these in-

stitutions were among the largest acceptors, but many other large acceptors reported
much smaller losses.

It is a fact worthy of note that the reason assigned as to

why the acceptor was fcfrced to absorb a loss was in so many cases a reflection of
faulty banking judgment, or of a possible lack of proper vigilance. Table 8 brings
out the fact that a large proportion of the recorded losses was associated with
failure of the borrower, or price declines, or condition in the trade, or fraud.
These are matters that it would be difficult to guard against by provisions in the
I Boardfs regulations dealing with acceptances.
Table 8 - Reasons Assigned for Amounts of Losses Incurred on Bills
Accepted during 1920-1932 by Class of Credit

Cause of Loss

Import

Customer failed
Price decline
Condition of
trade

•1,570
l f ?29

Fraud and misrepresentation

Shipment
between
Export Domestic Domestic foreign Foreigi Dollar Total
shipment storage countries storage exchange
(000 Qnitted)

59

52

142

1,387

654

187
#908

50

46

794

475

$50

•810

$3,326

$3,024
2,232

75

459

•4,056

Tbtal

•1,070

41

664

All other

18 $ 44

•104
459

•262

•

175
2,694

2.21G
$1,147 $44 £10,341

American Acceptance Credits Under Standstill Agreements,- So far, this
report has been confined to a survey of the experience of American banks in connection
with acceptance credits executed between the years 1920 and 1932 inclusive and supplies a reasonably complete analysis of such unsatisfactory cases as have occurred
in the acceptance business as it has grown up under existing statutes and regulations.



25
It has omitted any study of the so-called standstill agreements: arrangements
which applied to short term credits, and nfhich were established between foreign
creditor banks and their customers in certain countries whose governments, because
of economic conditions, adopted restrictive regulations controlling the conduct and
settlement of foreign trade accounts.
The purpose of such agreements, generally speaking, has been two-fold: to
prevent wholesale withdrawal of foreign capital which would be ruinous to the exchange value of the /Currency and to overseas trade, and to enable creditors over a
period to liquidate their commitments in as orderly a manner and at as little
sacrifice as possible.
Inasmuch as the problem created by these agreements is in many respects
quite outside the field of ordinary acceptance experience, it seemed to your committee to warrant a separate and rather detailed analysis by itself. Accordingly
such an analysis has been made as a supplement to this report.

It seems appropriate

to include in this report, however, a summary as to two points, the losses sustained
by accepting banks, and the character of the paper drawn under credits made subject
to standstill agreements.
Losses Incurred in Standstill Liquidation. - It should be borne in mind
that the agreements arose not from the inability of the debtors to meet their obligations in their own currencies but from their inability to make transfers of funds
through the normal channel of the exchanges, ftiis is confirmed by most of our aceepting banks, as illustrated by the comment of one of the institutions whose experience is included in this survey* The bank in question, after referring to the
prolongation of credits by the various standstill arrangements with central European
countries and exchange controls which have stopped payment for goods in gold, goes
on to state that they have many customers who, although possessed of ample resources,
are prevented by government decrees from converting these resources to make possible
payment of contracted obligations. Furthermore, the great majority of credits extended by American banks under the most important standstill agreement, that with
Germany, have been guaranteed by German banks, and public policy has not penaitted




26
any of the latter to suspend payments. Hence losses which creditors have incurred
in connection with acceptance credits subject to standstill agreements have not
arisen from fault in the individual credit but have been due almost wholly to the
discount incident to the conversioh of foreign currencies into dollar exchange under
existing governmental controls*
Since this discount has ranged from about 15$ to 51%, the loss to accepting banks has been substantial. In the case of Germany, for example, American
banks in liquidating some $246,000,000 of acceptance credits up to December 1935
may have lost something between #32,000,000 and $45,000,000 in disposing of registered
mark balances.

Furthermore there have been losses in liquidating Austrian and

Hungarian commitments although absence of available data does not permit of an
estimate of the amount of these losses. Complete figures of loss in connection with
standstill credits would loom large beside the $10,000,000 loss shown in other parts
of this report on all other American acceptance business of seme $50,000,000,000.
Under the circumstances outlined above, however, losses under the standstill are of
a quite different type from those incident to the ordinary practice of the acceptance
business.
Character of Acceptances Subject to Standstill Agreements. - The second
important consideration in reviewing standstill experience is the character of the
paper drawn under existing credits#

There can be no doubt that a substantial volume

of such drawings partook at one time or another of the nature of finance paper and
was not supported by actual commercial or industrial transactions which would provide
self-liquidation for the bills which our banks were called upon to accept.
The Committee has examined the available figures and has asked the opinion
of competent bankers with respect to the extent of any laxness in practice and the
circumstances under which it occurred. The only figures utfiich are available on the
subject relate to the period after the standstill agreements had gone into effect.
Reports of 100 American banks, as of October 31, 1935, indicate that of $288,000,000
of acceptances outstanding on that date under the German Standstill Agreement, 39$



27

were accompanied by proof of eligibility such as shipping documents or other evidence;

31$, although unaccompanied by documentary evidence, were nevertheless

presumably capable of classification as eligible;

and 30$ were definitely not self-

liquidating and offered no evidence as to the nature of the underlying transactioni
Informal inquiries among twenty-five of the most important accepting banks indicate
that at the end of 1935 about three-quarters of the bills outstanding at that time
could be classified as eligible under the regulations of the Board of Governors of
the Federal Reserve System.
In interpretihg the foregoing data it should be noted that they reflect
operations four years after the standstill agreements went into effect,
German authorities, as well as many accepting banks, maintain that until
recession in foreign trade set in and commodity prices began to fall, the great
majority of bills presented for acceptance represented actual self-liquidating business transactions.

There is, however, considerable testimony that even before the

standstill agreement had gone into effect some American acceptors had been at times
lax in depending on general statements made to them by foreign banks and not re-

A
I buiring more detailed information regarding the transactions underlying the bills
f accepted*

Such practice has been at times defended on the ground that it is similar

to the practice of London bankers who have generally placed more reliance upon names'
than on ascertaining that the underlying transaction back of each bill was by nature
self-liquidating.

There is no way of knowing the extent of the laxity which existed

in this particular, although 'belief in the market is that it was not general*

It

does not appear that laxness of this sort had any important responsibility for the
later losses on acceptances except to the extent possibly that a more exact scrutiny
of bills might have led to a somewhat smaller volume of credit extension and so to a
smaller volume of bills coming under the standstill agreement.

The probability is,

however, that more precise technical requirements would not greatly have restricted
the volume of bills drawn.




The total volume of bills was in keeping with the general

28

tendency of the time toward excessive credits of all sorts to the central European
countries•
It is clear that an important change in the character of bills took place
at the time the standstill agreements went into effect•

With the decrease in

volume of transactions which could give rise to eligible bills, many foreign customers
of accepting bemks found it increasingly difficult to provide eligible paper, although they were still in need of working capital*

Under the standstill agreement,

the Germans agreed to provide eligible paper as far as possible and the right is
reserved, when it is npt possible, to carry the resulting debt in the form of a cash
advance or overdraft, of course at a higher rate of interest.

Ihe majority of ac-

cepting banks have so treated bills *4iich were not definitely self-liquidating*
Indeed, to a large extent they have kept their German bills off the market entirely*
Although the large amount of finance paper which admittedly existed can
scarcely be reconciled with the ideals of the best banking practice, losses incurred
by American acceptors due to this cause have been negligible, since, as stated above,
the majority of American credits were guaranteed by German banks which as a matter of
public policy have not been allowed to fail*
By far the greater part of American acceptance credits subject to standstill agreements have been extended to German banks which in turn made them available
to their commercial and industrial customers.

Consequently, there have been numerous

substitutions of one debtor for another as well as changes in the types of transactions underlying the bills presented for acceptance.

In addition, not infrequently

original acceptances have become overdrafts and subsequently been replaced by bills
which again have become overdrafts so that except in relatively few cases there has
been no real continuity of individual credits*

For these reasons it does not appear

possible to apply the same methods of analysis to individual acceptances as were
used in the earlier part of this report.

Bie supplementary report appended herewith

deals in greater detail with standstill experience*




29

Acceptors* Recommendations for Changes in Rules of Procedure# - Of the
156 banks which responded to the questioxmiaires only about 20 made definite recommendations as to changes in the law or regulations relative to acceptances*
recommendations may be classified:

(a) for more restrictive requirements;

The
(b) for

liberalizations•
More Restrictive Requirements. - In connection with more restrictive requirements, the largest number of suggestions were made with respect to shipments
between foreign countries and the smallest number with respect to import credits.
A brief summary of these suggestions is given by class of credit as follows:
Baport Credits:
When goods released on trust receipt, latter should not remain
outstanding after transaction completed.
Export Credits:
Restrict financing with respect to secondary distribution to
such merchandise as remains in original foraw
Documentary evidence desirable when acceptance drawn by
another bank and secured by export bills.
Actual documents should be in hands of acceptor from date of
acceptance.
Domestic Shipment Credits:
When goods released on trust receipt, latter should not remain
outstanding after transaction completed.
On six months1 drafts, tenor should be restricted to that of
eligibility for rediscount*
Credits Covering Shipments between Foreign Countries:
Acceptor should see satisfactory evidence of shipment*
Foreign correspondent should furnish full infoimation with
respect to purpose, customer, and self-liquidation.
Basis of transaction should be more clearly defined.
Sane requirements as for domestic shipment should apply*
Only banks specifically authorized by Federal Reserve Board
should do this business*




Require letter of guarantee from actual taker of credit*

30
Domestic Storage Credits:
Require adequate insurance coverage•
Emphasize independence of warehouse from credit taker.
On six months 1 bills tenor should be restricted to those eligible
for rediscount.
Require accepting bank to secure sworn statement from warehouse.
Restrict business to licensed warehouses only.
Require licensed graderfs certificate.
"Specifically, we wish to call attention to the fact that
Article B of Regulation A recites that the Federal Reserve Bank may
discount bills covering the storage of readily marketable staples,
provided the bill is secured at the time of acceptance and that under
certain conditions a Trust Receipt may be taken. Article A of
Regulation C recites that member banks may accept such bills, but it
is not indicated that a Trust Receipt may be taken. It would* therefore , appear that a member bank could accept a bill having warehouse
receipts in its possession at the time of acceptance and might release
the security free, provided it remained within the 10% of capital and
surplus limit. Such a bill, howeverr would appear to be ineligible for
discount under Regulation A. w
Foreign Storage Credits:
Acceptor should see satisfactory evidence of storage.
Modify regulations restrictively.
Require letter of guarantee from actual taker of credit.
Dollar Exchange Credits:
Submit each credit to Federal Reserve Boa*d for approval.
Restrict to amounts which may be covered in due course by
export documentary bills.
Review list of countries.
Soundness of this type of credit questionable.
General:
Limit acceptance business to transactions where evidence of
shipment presented.
Ten per cent limitation of credit extension to one individual
should be applicable to acceptances. Excess should be actually secured.



33Itaturity of acceptance should coincide with usual credit period*
Add to Article B # Section XI; "Where the details of the underlying commercial transaction are not otherwise evidenced, the acceptor shall obtain
a statement of its essential details.ff
Actual bills of lading should pass through bank.
It will be noted from the foregoing that the greatest unanimity as to
suggestions relative to any one phsse of acceptance practice is evident in the
category of credits covering shipments between and storage of goods in foreign
countries*
Many of the suggestions appear to be so obviously matters of ordinary
credit judgment and plain common sense that it would seem scarcely necessary to embody them in formal rules and regulations*
Suggestions for Liberalizations* - Proposals for liberalizing the law and
regulations were made with respect to two classes of credits: domestic shipment and
domestic storage. Removal of the 50 per cent limitation with respect to domestic
acceptances was suggested by several acceptors. Broadening the list of canmodities
eligible for domestic storage credits was also mentioned.

With respect to credits

growing out of domestic shipment, it was recommended that the requirement as to
documents conveying security title be liberalized*
A significant point of view was expressed by several acceptors, one of
which stated:
ff

We realize that at the inception of the acceptance
business in this country a certain degree of regulation was
required in order that this new form of credit should not be
directed into improper channels, but it is now pertinent to
inquire whether the increased understanding of the nature and
objective of this facility does not merit a complete revision
of these requirements.
f
f

31ixs is particularly true of transactions far domestic
account. We feel that too often the mere fact that a transaction
measures up to the standards established by the Federal Reserve
Bank in defining eligibility has swayed the judgment of the accepting bank as to its soundness as a banking proposition* Obviously, eligibility is no criterion for judging credits, but it
is apparently an undeniable influence due possibly to the emphasis
that the Federal Reserve Bank rulings place on the matter of
eligibility. We feel the time must come when the Federal Reserve



32
Bank should place its chief reliance on the judgment and standing
of the accepting bank, and use that more as a standard for purchasing or discounting bankers acceptances, rather than the fact
that the bill offered complies to the letter of certain regulations*
Other accepting markets have effectively controlled their acceptance
business in this manner without the restrictions of well meant, but
inelastic regulations.11
General Suggestions. - In addition there were some noteworthy suggestions
of a general nature concerning procedure outside the field of regulations.
"We might suggest that the Act and Rulings now
governing the American acceptance business be so condensed
as to be readily available for reference purposes."
n

. • • the Federal Reserve Bank, because of its
relation to the acceptance market, through the buying rate
and its own purchases of bills, is in an exceptionally good
position to centralize the available information regarding
the extent and distribution of the acceptance business, and
to assist the accepting banks and accepting houses to handle
the business along sound lines; that the practice of making
this infoimation available confidentially is, we believe, a
constructive step and should help to avoid a recurrence of
the condition of excess advances to certain foreign countries
which developed prior to 1930.ff
"• . • For example, if it could be agreed that no
acceptance facilities would be put at the disposal of any
customer unless the banks receive semi-annual audited statements, an important step in the right direction would have
been accomplished. Under the present system we are sometimes
told by a client that such and such a bank is not insisting on
audited statements, and that if we wish to do business with
them we must be satisfied with their own figures*
"Closer cooperation among the banks would also enable
a more careful following of trust receipt funds, and bring
about a more careful adherence to the specific terms of a trust
receipt.
"Past experience has shown the difficulty of getting
the New York accepting banks and bankers to act together on
points of this kind. However, some progress along this line
might be made if the Reserve Bank would call a meeting of
representatives of certain of the larger acceptors or bring
the matter to the attention of one of the existing inter-bank
committees."
"Accepting banks should of course observe the regulations strictly. The Federal Reserve Bank might find it
desirable to resume the practice of making test checks by asking the accepting banks to furnish full particulars of the
underlying transactions* on acceptances which it may select
from time to time."



33
Conclusions
The statistical analysis pursued by your Committee confirms the impression
heretofore prevailing in most quarters that the preponderant part of the flftremtance
business of American banks as it has grown up under the guidance of the regulations
of the Board has been satisfactory*

There is no recorded instance of an investor in

\ bankers acceptances having lost a dollar of principal and no bank has closed or sus-

pended payments because of difficulties arising from its acceptance business*

The

analysis has shown that losses which have been suffered by American institutions
because of their acceptance commitments have been for the most part associated with
the tyfces of eventualities which shouldbe forestalled more by the judgmentt prudence,
and vigilance of bankers than by officialregulations*

Of the $10,300,000 of losses

suffared by acceptors in the years 1920-1932, not including the losses growing out
of standstill business, about 80 per cent were associated with such matters ast
failure of the customer, price declines, conditions of the trade, and fraud.
It seems to your Committee, howeverr that this record does not justify an
attitude of complacence on the part of the Federal Reserve System in*its general
responsibility for the rules and regulations under which American acceptance business is done. We hold the view that the bankers1 acceptance should be the prime
commercial credit instrument, and that acceptances which come into the market should
be based on transactions as nearly riskless and above suspicion as possible.

On such

|a premise, any loss in the field should be the occasion of regret and of effort to
^foreclose its recurrence.
Hie statistics indicate that, even emitting standstill credits which are a
separate problem, the greatest amounts of unsatisfactory experience were encountered
in the fields of shipment between and storage in foreign countries, and import
transactions.
There is, however,

considerable ground for believing that American banks

did not uniformly adhere to the ideals of acceptance practice in their central



34

European business.

In the light both of this study and the experience with standstill

bills, &any acceptors have expressed the belief that the regulations should be
tightened to raise the standard of acceptance practices in the field of shipment
between and storage in foreign countries. With respect to such transactions several
recommendations made by acceptors looked in the direction of requiring that the accepting bank be in possession of full information as to the financial responsibility
of the recipient of the credit and the self-liquidating nature of the transact ionf
and that a more adequate control over the goods by the agent of the accepting institution should prevail until the credit be liquidated. ftxis point of view was
particularly well expressed by one important accepting bank:
"When the use of the acceptance facility was
initially fostered and laws and regulations formulated,
every effort was made to prevent the acceptance of purely
finance bills, and provisions were made for exhibition of
documents evidencing related actual self-liquidating transactions as the basis for acceptance financing. Later the
regulations were modified and the broadest latitude permitted
member banks in determining eligibility. This greater freedom
resulted in certain abuses, improper practices and the creation
of bills not even remotely associated with transactions *hich
would liquidate within the life of the bill. Instances of this
nature have been submitted to the standstill committees with
which you are familiar. While the broad powers granted acceptors are highly advantageous and desirable, we suggest the
possibility that the creation of such bills should be determined by more definite regulations as to the type and extent
of evidence which should be required byprospective acceptors
as to actual contracts of sales to be financed or actual movements of goods before bills are accepted as eligible*ft
The evidence the Committee has assembled indicates there is room for some
improvement of practice along the lines of the foregoing quotation, especially with
respect to bills covering shipment between and storage in foreign countries. The
Committee has raised three questions with respect to this problem:
(1) Whether the general field of acceptance activities
should be narrowed,
{2} Whether some additional and more specific regulations
should be issued on this point,
.(3) Whether reliance should be placed mainly upon the gradual



35

development of sound traditions of practice on the
part of accepting banks*
Ihese three questions will be discussed in order#
(1)

In the early stages of this project, the question was raised in the

Committee as to whether "American banks are justified in granting acceptances to
accommodate world trade other than incidental to facilitating the needs of American
customers directly engaged in exporting or importing goods between the United States
and a foreign country*fl

This challenge involves, of course, the question of the

"necessity for permitting banks to grant acceptance credits to finance (a) movement
of goods between two foreign countries each foreign to the United States; (b) storage of readily marketable staples in foreign countries whether or not underlying
commodities were produced in the United States."
Ihe fact that acceptance activities have been authorized and practiced
extensively in a field in the past creates a strong presumption against prohibiting
them in the future*

If American accepting institutions can find a profitable and

reasonably safe field of activity in financing foreign shipment and storage transactions, no sufficient reason for foreclosing the opportunity seems apparent to your
Committee. From the point of view of the balance of payments of the United States
the outstanding commitments of American investors in acceptances drawn to finance
transactions involving shipment between and storage in foreign countries have the
same effect as an equal volume of any other type of short term lending.

Out of the

contacts and good-will incident to acceptance activities in this field grow other
satisfactory business for American banks and their customers*
More than this, if reference is made to British acceptance practice, it is
found that the extension of American activity into the field of purely foreign
transactions has good precedent.

The best information indicates that a large pro-

portion of the acceptance liabilities of important British banks relates to transactions in which neither the buyer nor the seller of the merchandise is a resident of
the British Isles, or of a British dominion for that matter.



It is to be presumed

36
that in the future the money market in this country will be called upon to fulfill
many of the functions of a world money market and the regulations governing ac-*
ceptance practice should, as far as it may safely be done,provide sufficient
latitude for the proper fulfillment of that function.
(2) As previously noted several of those replying to the Committee's questionnaire have suggested the modification of Federal Reserve Board regulations to include definite specification of the type and extent of evidence which should be
required by prospective acceptors as to the actual contract of sales to be financed
or actual movements of goods before bills are accepted as eligible. The present
regulations as they relate to the financing of transactions arising out of the* importation or exportation of goods are drawn in broad terms and make no specific
requirements as to the character of evidence accepting banks must obtain*

The

conditions under which transactions of this sort take place are so varied that it
would be difficult if not impossible to draw a regulation which would lay down
minutely requirements as to evidence without making compliance impossible in many
sorts of transactions.

For examplef in many cases of shipments of goods between

foreign countries it would be impossible for the accepting bank to obtain shipping
documents at the time of the acceptance.

It does, however, seem possible that the

regulations should contain a general requirement that with respect to credits covering export and import transactions and shipments between foreign countries, the
accepting bank is expected to obtain satisfactory evidence, documentary or otherwise, as to the precise nature of the transactions underlying the credit extended.
Such a general requirement in the regulation serves notice on accepting banks as to
what may be regarded as sound acceptance practice, and provides a basis for the
examination of individual credits which may be made later by bank examiners or the
Federal reserve Hanks.
(3) While as noted above the Committee received a number of suggestions for
changes in regulations the Committee was constantly impressed with the number of
comments to the effect that sound acceptance practice depended upon credit judgment



37
and the development of sound traditions. This point of view was well expressed by
the officer of one of the large accepting banks in the following language:
11

1 cannot help but take this opportunity of
reiterating *** that primarily acceptances are an instrument of credit and their value is based on the soundness
of our judgment of the credit risk involved. It is my
impression that the eligibility provisions have a tendency
opposite to their original intention* To the inexperienced
I believe they endow transactions which can be classified
under the regulations as eligible with a primary assumption
of soundness. A credit risk, of course, does not depend
upon the nature of any single transaction but many other
factors enter into the credit risk independent of the
transaction it self# w
__.
Recomaendat ions
t/

(1) It is recommended that the acceptance privilege be not withdrawn
from any of the seven important fields*

+s

(2) It is recommended that further liberalizations in regulations of the
Board of Governors be not made at this time#
(3) It is recanmended that a footnote be added to subparagraph (1) of
Section XI of Regulation A reading as follows:
\7hile it is not a requirement of the eligibility
of bills referred to in clause (1) of Section XI of this
regulation that documents covering the shipment of goods
be attached to the bills at the time of acceptance, it will
be presumed by Federal reserve banks in discounting such
bills that the accepting banks have obtained satisfactory
evidence as to the transactions underlying such bills.
(4) It is recommended that continued emphasis be placed on the procedure
of check-up through examinations. In keeping with this proposal the Reserve Board
on January 29, 1935, addressed letters to the Federal Reserve Agents and the
Conptroller of the Currency requesting that when examinations of members of the
Federal Reserve System were being made attention be paid to whether the acceptance




38
business of the respective bank was being conducted in conformance with the law and
regulations of the Board*
(5) It is also recommended that the Federal reserve banks, in addition
to their usual scrutiny of bills from the standpoint of eligibility and acceptability, make at frequent intervals a more extended investigation of bills which are
purchased or offered for purchase in order to ascertain whether the acceptances are
conforming with sound acceptance practice.
It must be recognized that in the long run sound acceptance practice depends most largely on sound credit judgment on the part of the accepting bank, and
the principal reliance for improvement in practice must be placed upon the gradual
process of the seasoning of judgment of acceptors and the development of sound
traditions•




W # Randolph Burgess
Ira Clerk