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X-998
.. ..,. Release for morning papers of June 18.
ADDRESS BmFORE TRADE

ACCEPTANCE COUNCIL

CHICAGO- JUNE 17, 1918.
BY PAUL M. WARBURG.

For at least three years after the automobile :r.."lde itrf npp"..:rs.~sthere still
were men and women wr.o argued passionately that the people who used it were
snobs and murderers, and that such machines should not be permitted on the
public highways.

The exponents of this view, at that time, were still dealing

with the automobile r..s with a

th~ory;

they did not realize that, while they were

debating, the automobile had already proven its worth, had been definitely
adopted and had begun to gain an ever-growing importance in the economic life
of all nationso
I well remember that similar discussions took place concerning the Federal
Reserve System during the first year or two of its operation.
urging that it was an impossible system
to old banking practices; an
The men who

eJ~:pressed

expen~ive

conc~iv3d

People were still

by theorists and doing violence

luxury that might be dispensed with.

these vie·ws did net reali?.e that, whi:}.e they were protest-

ing, the system had driven its rc<lta sc firmly int'.) thEJ gro·..utd that it could no
longer be removed.
past as the

backbo:m~

It is now recognized by even its severest critics of the
of the bank:i.ng organization of the United States.

A similar condition prevails at present with respect to the trade acceptance.

It is at this time the subject of heated debate.

Some consider it im-

practicable and not suited for the use of American business men; others consider
it dangerous and think it ought not to be encouraged or perhaps even permitted.
But, as in the two cases just cited, while the trade acceptance is being discussed as a theory, it already had become a fact.

The trade acceptance is here -

it has proven its worth in thousands of cases, it has come to stay, and now that
the first and roost difficult step in popularizing it has been tak6n, its general
use will grow by leaps and bounds.




X-998

- 2-

In this

di~cussion

concerning the merits and demerits of the trade accept-

ance, both sides, to my mind, have made the mistake of over-stating their case;:
}

The champions of i.he trade

accep-~ance

are not warranted in saying that it is the

only proper instrument of credit, that it should . o:- will~ drive out rapidly all
and the cash discount syete;.n,
single name paper lthat to use H is the highEJst degree of patriotism and that
to refrain from using it shows a lack of publlc spirit&

On the other hand it is

e1fU6.lly unwarranted to assert -thfl"t the l.!se of the trade acceptance by the busi-

'

ness men and bankers i.n the UYJH8d States is :.l.;npracticable, or that ite adoption makes for bad and unsound business habi t.s •
Why should anyone who sells goods for cash be expected to change his method
and attempt to sell his goods on long lterm credit for the mere satisfaction of
using trade acceptances, unless he finds that the cash discount which he offers,
in order to avoid the granting of credi'l:,, is so heavy that · ~t would pay him
better to make the change, or unless he finds that in particular cases he may
render a public service by permitting his purchasers to pay by trade acceptances.
While, therefore, we readily concede that it is fcolish to believe or to
argue that the trade ac·::Gptance should be used in settlement of any and all
business transactions, it is equally foolish to deny that hundreds of millions some estimate
called "open

billions of dollars - worth of goods are sold today on
acco~mts",

s~,;

and wherever that is done there can be no vestige of

doubt that it makes for better business methods when seller and purchaser agree
upon a definite obligation to pay on a certain date and express this in a negotiable instrument, permitting the seller to finance himself on favorable terms
for the period of the credit granted by him to the purchaser of his goode.
The Trade Acceptance Council informs me that there are today over 4 •.('\00
firms that have adopted the trade acceptance, and the list of these firms embraces concerns of great importance as well as small houses.



It includes the

- 3 -

X-998

flour mills of Oregon as well as the lumber mills in Florida.
month two trades of

During the last

great importance have declared themselves in favor of using

the 1:trade acceptance.

The Raw Silk Trade Council passed a resolution that ''On

and after July 1st, 1918 all raw silk, except for transactions based upon Bankers
letter of credit or the dre.wing of foreign drafts direct upon the buyer, shall
be sold, or contract of

sa~e

made with buyers, without any exception

what~oever,

upon terms of cash settl8ment, !=lrompt or within ten days, or trade acceptance,
if other than cash terms are !'l.p..~eed upon.

Such trade acceptances are to be

given by the buyer to the sene·(" within not later than thirty days from date of
invoice.

All trade

accepta~o~a

shall be made payable at a bank, located

p~efer­

ably at a free or discretionary point, otherwioe the cost of collection is to be
charged to and paid by the acceptor".

The buyer is not, however deprived of the

privilege of offering cash less proportionate discount, at the rate of six
per cent per annum, in settlement of an invoice calling for trade acceptance,
but he must do either one or the other within thirty days from the date of the
invoice rendered.
This change of terms is made on the conviction that the adcption of the
trade acceptance method of settlement will eventually work out to the benefit of
both seller

~nd

buyer.

The circular sent out giving notice of this agreement is signed by thirtysix of the leading firms in the silk trades.
A highly important action was taken on June 8th at a. meeting of a Commit.tee,
appointed on May 4, by the National Association of Cotton Manufacturers, representing spinners, cotton shippers and bankers.
the conference.

Governor Harding was present at

A resolution was unanimously adopted, recommending that in

addition to present facilities, the bankers' acceptance and the trade acceptance




- 4 •

x-99S

be used whenever practicable and as far as possible in financing

sext season's

cotton crop.
These developments .speak f0r themselvesu
Moreover it is of no small significance that other countries, whose financial methods (since the adoption of the Federal Reserve System) we are approaching more and more, are using th'3 t:rade acceptance almost exclusively,.
inconceivable that in these cou':',+.ries the trado

It is

acceptance should so

excellently serv-e its purposo i.f it. were really as devoid of merit as its critics
assert.
About two years ago I had the honor of addressing the Credit Men's Association at a meeting in New York

u~-:lon

the topic of the trade acceptance, and since

then so much has been said about. the advantages in the use of that method of
financing that it would be needlessly taxing your patience were I to undertake
to demonstrate again to you that the trade acceptance, when properly used, turns
.a frozen asset into a liquid one, and that the firm which organizes its business
on the basis of the trade acceptance is plncji:lg itself in a very much stronger
position than its competHor wb: refuses to moderni:te on the same lines.
would be needless repetition W13re l to
you are familiar.

:t~eiterate

It

-the oth'3r arguments with which

It may, however, be useful to analyze this question:

Why

is the adoption of the trade acceptance so vigorously opposed by some bankers
and business men!

Let us consider first the reasons given by the bankers: Some

bankers assert that in buying

6

promissory note the mere fact that they are con-

scious of buying the naked note of a customer furnishes a reason for their feeling obliged to carefully analyze the statement of the customer and to judge the
merit of the borrower upon the statement of the latter's financial condition.




X-998

- 5 ..

They allege that this practice is safer than that of purchasing a trade
acceptance issued by the

~rume

firm because, as they say, in that case

they are likely to rely on the legitimate character of this double name
paper without examining as cautiously as they otherwise would the general
condition of the borrower; the likelihood of their adopting
they urge, might lead to the manufacture and sale

~f

·~bat

course,

fictitious accommoda-

tion acceptances on the part of their borrowers, and they cite experience
in support of their contentionQ
Other banke!'s state with great force t.hat they are opposed to the trade
acceptance because they would not feel justified in continuing to buy the
single name paper of a borrower who has adopted the habit of selling his
trade acceptances.

The reason given for this view is that whoever buys a

trade acceptance acquires the first lien on what would otherwise have
~epreeented

one of the accounts receivable of the concern which drew the

acceptance, and in addition to that lien, in case of bankruptcy of the
drawer of the acceptance, the holder of that acceptance would rank equally
·with the unsecured noteholder as a general creditor
acceptance which the acceptor might not have paid.

fo~

any part of the

As you can readily

see, it is impossible that both of these opposed views should be correct;
one banker asserting that he will not buy trade acceptances because he
does not think they are safe enough, the other that he opposes

the

trade acceptance because it is so good as to render unsafe the purchase of




X-998
- 6 -

single name paper of any customers haviug sold trade acceptances.
Which of the two arguments is sound?

To my mind neither.

It has never

peen contended by the champions' of the trade acceptance that these acceptances should be bought by anyone who has not familiari:ea himself
thoroughly with the financial condition of the maker ef the paper;

he

should take this precaution just as if he were buying a single name uote
and as long as he does that there is no reason whatever why he should not
be capable of judging solvency and standing from the statement of a borrower who sells the trade acceptances he receives just as he can today
from the statement of a firm which borrows only on its own note.

Indeed-

one of the main virtues of the trade acoeptance is that it clarifies the
statement, inasmuch as lt shows on the asset side exactly how much there
is

availa~le in liquid i~ems, amongst which are the trade acceptances

owned, against outstanding liabilities.
on his single name
w~ld

not~,

funds
If the b~rr~er wishes to obtai!/

'
in addit:lotl. to trade acceptances sold (which

be shown as a contingent liability), he would have to satisfy the

banker that these funds are required for temporary working capital or for
the purchase of material used in the

p~ocess

of manufacturing; unless,

indeed, the borrower were pawing for the pl.:rct.ases by giving his own trade
acceptance.

In the latter

cas~

the trade acceptance would show as an obligation on the liability side.
·Thies leads us to the objection made by the banker who is unwilling
to buy the single name note of a firm which sells trade acceptances.
The canadian and European methods indicate, I believe, the proper

answe~.

In Canada and England and on the European continent it is quite customary
for banks to grant a customer an overdraft credit.



Such a

11

line" re-pre-:-:;

X998
- 7 -·

sents the sum on which the customer may count with fair regularity.

I~

addition to that. the Canadian bank will buy freely the customer's trade
acceptances, though of course within given limHs.

Generally speaking,

it may be said that if the customer be stroi"..g and solvent, and i f ho be
considered fairly conservative in choos5.ng his purchasers, the bank w.'\.11
be found ready always to buy a handsome amount of tr-ade acceptances h1
addition to the regular overdraft granted, relying on the fact that even
in case of insolvency on the part of the customer the larger percentage
of these trade acceptanceswill usually be

paid, the risk being so large-

ly divided.
When our

ba~ks

begin to look upon the trade acceptance from this,

let us call it., llanad.ian point of view; I

th~.nk

thP-y may well conclude

that it is perfectly proper and safe for them to buy a certain amount of
single name paper (corresponding to the overdraft) and in addition to
take a liberal amount of the customers'

t~ade

acceptances, provided they

use care in scrutinizing the statement of the borrower.

I believe many

of them will be willing to admit that the f:.ag::.--ant cases cited by them
of losses ofi fictitious trade acceptances were

those 'lfuere the bankers

neglected to ask for or to insist on getting the cust.omers' statement.
It may be timely for me to add that

sin~e

the heg:O:.nnl.ng of the operatiJ7'J.S

of the Federal Reserve System, the Board has rlu:r.o.e all in its power, by
regulation and admonition to insist on full and frank statements on the
part of business firms, as well a.s of banks, and bankers themselves..
banking and business the greatest safety lies in publicity and

:..n

frankne~8.

I am willing to admit that I have a lingering suspicion that certain
banks which oppose the trade acceptance may be somewhat influenced by the
~i·.·

tact that siugle name paper ibffers a better interest return than the trade




X-998

acceptance.

I

~

glad, however. to state my belief that the vast

majority of the banks take a different point of view in this respect,
and that to them the facts that the trade acceptance has been recognized
as a preferred type of paper by the Federal Reserve Banks and that :i.t
has a wider and more favorable market than eingle name paper, §re of sufficient force to make them very ;villine; and even anxious to buy these
trade acceptances in spite of the lower interest return, just as they buy,
by preference, bankers' accept·ances on account of the greater liquidity
of the latter, even though at present such accep'ttances net only 4~ as
against the commercial paper rate of 6% or more.
No1; let us examine the reasons why some business men oppose the development of the use of the trade acceptance.

Some, I believe, fight it

because they are jealous of maintaining their business on a cash basis that is to say, they are willing to pay even a high premium in order to
avoid the cares and risks of sales on credit.

That is a question Which

every business man must decide for himself, and, as I said in the beginning, we should not attempt to force anyone to do anything in this respect that he does not consider to his own best advantage.

It is

im~

possible, however, for me to understand why any business man should be
alarmed, or excited, because of the use of the trade acceptance by othe·t's
who are obliged to sell their goods '!on open account".

Valid objectio11S

could be raised only by one of two classes of business men:

~eak

or un-

reliable purchasers who object to binding .,hemselves to a definite obHgat1on $o pay on a certain date (in which case, however, the reasons for
the opposition on the part of the purchaser ought to be the very arguments
for the preference on the part of the seller);



or certain firms of great

X:•998

- 9 -

financial or commercial strength, who desire to preserve their posit ion
of advantage as agai::'lst weaker competitors.
note, the strong firm,

wj

When borrowing on its

0wn

th well established credit, can obtain larger

loans and on more favorable terms than its small competitor, and H l.s,therefore, in position to finance its purchases and its sales on a moro
favorable basis than the small firm.

It gains the advantage both as to

the larger· scope of business it can do and the lower interest rate it en··
joys.

True, it could probably do a larger business than at present by

adopting the trade acceptance pla.n,but by thus adopting the trade acceptance basis small firms would probably profit more ih proportion than the
larger ones; -their handicap would be
The general use

of

lightened~

the tiade acdeptance is likely to tend towards

greater standardization of banking paper &nd.greater equali~ation of
interest rates, and I am inclined to think that we might cail it a step
towards greater democracy in commerce· and ban'JI:ing.

That is one of sey;eral

reasons why the Federal Reserve Board favors the policy of granting a
preferential rate for trade accept a.DCes.

But, speaking broadly, the Fed-

eral Reserve System is interested in seeing the business of' the country
done on the soundest possible basis.

1Vhatever makes tor prompt paymeont

may be considered an actual gain at a time when our efforts must be tent
upon saving as much as possible, not only in material and labor, but a:' so
time and credit.
It is one of the most difficult problems at this juncture when hundreds of millions of dollars have to be shifted every day, to shorten the
many circles in which it travels, not only in the large operations of the
government,



~t

in every individual transaction.

It is in the general

X-998
-- 10 -

interest that money paid out for wages and material return as fast as
can to the produce:..· wli.en b.j_s goods are .sold.

~t

Pending the return of t?:te

monies due to him he must rely on bai"..k credit, which naturally iE limited,
and consequently he has to adjust the scope of his operations to the
epeed WithwhiCh hiS "turn-over" Can be COmpleted.
plays a most important part in this respect.

The trade liCCeptanCA

By securing trade

acceptance~

even though he may hold them to maturity. the manufacturer can figure
with greater exactness what are his obligations and his
assets,

and,b~·removing

ava~lable

cash

elements of·uncertainty. he is enabled to carry

on a larger business and to do it in greater safety.

At a time when so much depends upon using every possible advantage
in order to speed up production, so as to avoid an unnecessary tie-up of
funds, the use of the trade
to the national welfare.

acce~ance

may be considered a contribution

It must not be said that whoever fails to use

the trade acceptance is unpatriotic, but it may be said that it is essential that every one .

do what lies in his power. to remove anything

that stands in the way of securing ttie

g~eatest

possible efficiency of

our country at this time,and anything done in this direction is patr:l.otic,
It has lately been explained to me that canneries are facing a
rather difficult situation, inasmuch as all prices for cans, boxes anc
wages have risen so much that during the coming canning season the credits
usually available for t~e canneries may ~tt be sufficient, the amount of
money involved having doubled and the 10% limit in many cases prOhibiting
the country banks from providing locally the necessary advances,
cussing this problem and tr1.ing to

sug~;est

In dis-

means o:f relief, I asked the

question "How do the canneries pay for their cans and their boxes?"

1

was told that they pay cash •• I inquired "Could not the can manufacturers
t:."'l.{r> t,,.~.rlP-




8 ~~ept

ances in payment for their cans?"..

The answer

w~'~ that

X-998
- 11 -

the can company must ?r:w ca:;h itseif r.'cr the tin that it buys from the

steel manufacturer; th::J.t possi b1_y next year something of the sort mie;bt
be

arrane,'Bd~

but that for t'b.:ls

~;·ea.scn

j_t would he too late..

I

dl(j :•J.''lt

have the time to look further into the matter, nor is it my intentloL
to venture any opin:.on as to whether or not it might be practica'!:lle

tc

these important companies to change their methods of selling their goods·
No doubt they consider themselves better protected in selling for cash
and probably they control the market sufficiently to enable them to insist
on cash terms.

On the other hand, it is clear from the situation that I

have described that great relief could be given in this particular case
to the canneries, -provided, of coutse, that their credit warrants it if they could be permitted to pay for their tins and their boxes by 90day trade acceptances.

The process of canning is so rapid that probably

even a shorter te~ than 9Q-days of credit might prove sufficient. As
prooess
.
soon as the canni~ is ebmpleted• .t am tbldt the ~anners are able to secure their loans by warehousing and pledging their finished product, and
the difficulty of financing is dVetcome.

But for the short period of the

peak of the load the use of the trade acceptance might be of the gl"eates-..
adva.ntat;;e to them.
Facilitating

~he

process of manufacture of food products is certain-

ly a service which contributes to the national interest at this time, and,
while I have mentioned this case merely far the purpose of illustration,
I hope that it will not be taken amiss if I venture to urge the large
industrial concerns in dealing with this question not to
elusively from the point Of

vi~

~nsider

it ex-

of what is to their own best advantage,

but to bear in mind that in many cases they have the opportunity of




rendering a distinct service to tho national interest, an o~portunity
which, when once crearly recognized, they will not wish to miss at this
juncture.
In this connection, it nay be us3ful to remind you of a ruliug
given by the Federal Reserve Boa)"d (printed in the March 1917 Fedrn·a 1.
Reserve Bulletin) to the effect that a trade acceptance, i f drawn wi ~h­
in reasonawle time after the shipment or delivery of the goods, rna) be
considered as a bill of exchange drawn against actually existing value,
so that a national bank may buy such trade acceptancus from its customers
even after it has

re~ched

the limit of 10% of its capital and surplus,

which constitutes the maximum credit such bank may grant a customer
on his single name

note.

In view of the greatly increased price

of practically all goods and the consequent larger amount of money
involved in production, the facility thus afforded by the use of
trade acceptances may prove of the greatest service, as you may
readily see from the problem of the canneries just described.
Great efforts are being made at present to reduce bank loans
as far as possible where they are made for the carrying on of business
transactions not strictly compatible with the public interest - that
is to say. not absolutely necessary for the successful prosecution of
the war or the health and necessary comfort of the people.




X-998
- 13 -

The single name note easily oerves as "camouflage" •

It is very

difficult to trace exactly what transaction is being financed by any particular note.

The trade acceptance, on the other hand, bears on its faco

the evldencc of its legitimate character - it is capable of proving a most
convincing "alibi" where there is doubt as to the purpose for which tho
proceeds havo been used, and it may, therefore, be a great help to the
bnnks in carrying out the national object of conserving to the utmost material, labor, transportation and credit.
It may be proper for me to avail myself of this opportunity of
pointing to the great importance to the Federal Reserve System of finding
ways and means of discriminating between essential and non-essential
credits.

The great speed with which new dollar values are being created

at this time and the enormous

doma~d

of governments for goods render it

imperative that we counteract the resulting inflation of prices by setting
tho brakes upon every unnecessary use of credit or material.

Normally

these brakes would be applied by enforcing higher interest rates.

In

view, however, of the necessity of keeping the money market in a condition
of sufficient ease to enable the government successfully to carry through
its vast financial operations, it would be to the greatest public advantage
if contraction of credit could bo brought about by voluntary discrimination
rather than by the compulsion of higher rates.

May I enlist, therefore,

your earnest interest and hearty co-operation in this most important phase
of "War E~onomy"?
Owing to tho Government's heavy demands upon the investment market
it has become very difficult for industrial corporations to raise money



X-998 "
- 14-

on reascnable tetms through the sale of securities.
.

.

This is a source of

embarrassment felt more keenly by the large corporations, which normally
depend upon the securities market for their financing, than for the smaller
concerns normally operating upon bank credit.

In consequence a good deal

of pressure has been brought to bear upon the Federal Reserve Board by
these corporations in order to enlist its interest in securing legislation

The i3oard

permitting the rediscount of notes secured by bonds or stocks.
possib~y f~vor

could not

such a step since it would tend to undermine the

liquid character of. the Federal R eserve Banks' investments;

but it en-

couraged these corporations to study carefully the question whether it

would not be· possible for many of them to avail themselves of the facilities of the Jaderal Reserve Banks by financing some ot their purchases
sales in the form of trade acceptances.

.In some cases that

has

or

been done;

. · before long it is likely to be done on a much lafg•r scale
tho war procoods an increasing burdon will be placod upon tho.
·
of the banks o.f the countr)C#
Fedbral Reserve Banks.
The rapid increase of deposits and loans./wMch
As

wo must look forward to as· incidental to the unparalleled scope of war expenditures, will create a constantly jrowing demand for moans with which
to, maintain the corresponding increase in the reserve balances required

by law.

The only reliable key to the Federal Reserve Banks' credit ta-

cUities is "eligible paper" and the most liquid paper which outside of the

..

Federal Reserve Banks commands the widest market and the lowest rates is
the "Acceptance", be it the bankors' or the trade acceptance.
for both is certain to grow in importance.

On

The market

the one band oui' banks,

Q.nd particularly the country banks, will become regular and eager buyers




X-998

- 15 -

as they realize in increasing numbers that instead of keeping balances with
other banks they do better in holding acceptances which produce a higher interest.
return and serve at the same time as a reliable secondary reserve ...On the other
hand several discount companies, recently established, or organizing, will prove;
important new factors, as purchasers
market for trade acceptances.

as well as distributors, in widening the

A growing volume of such paper, coupled with a

growing habit on the part of the banke" {of investing therein, will furnish an
additional and most valuable element of safety in the present emergency, and it
is sincerely to be hoped that the banks and the business men will join their
efforts in promoting the widest possible use and development of this important
means of exchange.
There has been quite a prolonged discussion as to whether the community of
the buyer or the seller should carry the trade acceptance; indeed the critics
of the trade acceptance state as one of their objections that it is apt to throw
the burden of financing primarily upon the seller's community.

The truth of the

matter is, however, that in case a wide market is developed for bankers' and
trade acceptances, they will be carried by that community which is the most eager
to invest its funds, be it the seller or the buyer's
neither the one nor the other.

cornrr~nity,

or one that is

lt is one of the main virtues of the acceptance

system that it makes for greater fluidity of credit.

Instead of permitting one

section of the country to become overloaded in consequence of local seasonal requirements, absorbing all available cash resources, bankers' and trade acceptances bring relief by flowing into discount markets of other districts where
money is more plentiful.

The adoption of the plan of financing the coming cotttn

crop largely through bankers' and trade acceptances ought to

re~ult ~

easing the burden to be carried by the South during the coming season.




gTeatly

•

X-998

- 16 •

In closing, may l be permitted. on behalf of the Federal Reserve Board,
to express its genuine and warm appreciation for the excellent work done ~Y
the Trade Acceptance Council.

For the benefit of the country you hav6 unself-

. ishly undertaken a difficult task, a canipaign of educe:tion; wl1ich require.
energy, consistency, patience, inteiligence and tact.

win only

ir

The trade acceptance can

the particular charac~eristies and requirements of each trade ate

studied carefully and sympathetically; only where a ~asis can be tound which
·permits the adaptation to the use of the trade acceptance without undue vi6lenee
or he.rm may we expect quick and permanent success.

ln meeting ail these

C.JS&d.ss-· your Council has shown itself fully equal to ite task ..

From experience of my own, I believe I may safely say that nobody kriows
better than members of the Federal Reserve Board that campaigns of
in banking exact a maximum of patience and persistence.

ed~cation.

The very experience,

however, of the Federal Reserve Board will, I hope, serve as an encouragement
to the Trade Acceptance Council.
There was as much active and passive resistance. to the adoption of the
bankers' acceptance as there now is exhibited in opposition to the trade acceptanee.

Today no one doubts any longer that the bankers' acceptance has come

to stay and that it has proved its worth as one of the most important media of
exchange, an additional element of strength, and an indi&pens•ble
~rt

'eomponent

of the vast structure of liquid asse:ts upon the solidarity of which the

aafety" of the Federal Reserve System and with that the safety of the country ia
predlcated.
If

the trade acceptance, in years to come, should occupy a similar

po'Bition and render a similar service - as I hope and trust it will - the Tre.d.e
Acceptanc• Councilwill enjGy the keen satisfaction of having done its full•
share in a de•elopment so greatly to the benefit of



-9 ~r

;coun~ry_