financial responsibility of the applicant. A bank acceptance may be created as follows:

A B & Co. in New York buy of C D & Co. in Galveston a quantity of merchandise. In order to reimburse C D & Co. in a convenient manner, A B & Co. arrange with their bank to accept on presentation the drafts of C D & Co., with documents for the merchandise attached. CD & Co. thereupon, under the terms of the sale, draw on the bank, which accepts the drafts, taking the documents. The draft thus becomes a bank acceptance. Then ensues a credit operation between the bank and A B & Co. as to what disposition is to be made of the documents and under what terms A B & Co. shall receive the documents from the bank. (It must be borne in mind that the bank is primarily liable upon its acceptance and the security for its acceptance is the merchandise for which it so acted.) This is usually easily adjusted. A B & Co. undertake by some means or other to provide the bank with funds prior to maturity of the draft in order that the acceptance for which the bank stands responsible, at the request of A B & Co., may be met.

There are certain distinct advantages both to banks and their customers to be derived from the creation of acceptances. These may be summarized as follows:

1. Bank customers can ordinarily borrow by this means more cheaply than by their straight note.

2. The use of acceptances makes it possible for banks and trust companies to properly and conveniently finance legitimate business transactions of their customers without using any of the bank's funds or the use of any additional funds.

3. Banks having surplus money which cannot be readily employed at the time can invest it in prime acceptances, which can either be held until maturity or sold in the open market, should such action be found necessary.

4. Acceptances of well-known institutions will more and more be sought as short-term investments and will be especially valuable for such a purpose, principally on account of their ready marketability.

5. Banks and trust companies can accept for a commission the paper issued by their best customers and sell it in the open market, thus adding to their business another feature which can be a source of definite profit.

6. The presence of the name of the accepting bank makes prime to the extent of the credit of the accepting bank the paper on which it appears. This at once eliminates the necessity and bother of checking the drawer or several endorsers upon paper, as the primary responsibility rests with the accepting bank. If this is in good credit all other names on the paper become proportionately of less interest.

7. With the development of the use of bank acceptances, the knowledge of the relations that the borrower has with other institutions, which the credit-extending banks will thus have, will create a condition of almost

automatic registration of paper, thus more than ever protecting the banks as well as the borrowers from the evil results of the overextension of credit.

Value/received and charge the
To Guaranty Trust Co. of New York

No New York, ny

BANK ACCEPTANCE

153. PROVISIONS GOVERNING BANKERS' ACCEPTANCES1

I. DEFINITION

In this regulation the term "acceptance" is defined as a draft or bill of exchange drawn to order, having a definite maturity, and payable in 1 Federal Reserve Board Circular No. 18, September 7, 1915, containing amendments to the act approved March 3, 1915.

dollars, in the United States, the obligation to pay which has been accepted by an acknowledgment written or stamped and signed across the face of the instrument by the party on whom it is drawn; such agreement to be to the effect that the acceptor will pay at maturity according to the tenor of such draft or bill without qualifying conditions.

II.

STATUTORY REQUIREMENTS UNDER SECTIONS 13 AND 14 Section 13 of the Federal Reserve Act as amended provides that(a) Any Federal Reserve Bank may discount acceptances―

(1) Which are based on the importation or exportation of goods;
(2) Which have a maturity at time of discount of not more than
three months; and

(3) Which are indorsed by at least one member bank.

(b) The amount of acceptances so discounted shall at no time exceed one-half the paid-up capital stock and surplus of the bank for which the rediscounts are made (except by authority of the Federal Reserve Board and of such general regulations as said Board may prescribe, but not to exceed the capital stock and surplus of such bank).

(c) The aggregate of notes and bills bearing the signature or indorsement of any one person, company, firm, or corporation rediscounted for any one bank shall at no time exceed 10 per centum of the unimpaired capital and surplus of said bank; but this restriction shall not apply to the discount of bills of exchange drawn in good faith against actually existing values.

Section 14 of the Federal Reserve Act permits Federal Reserve Banks, under regulations to be prescribed by the Federal Reserve Board, to purchase and sell in the open market bankers' acceptances with or without the indorsement of a member bank.

III. RULING

The Federal Reserve Board, exercising its power of regulation with reference to Paragraph II (b) hereof, rules as follows:

Any Federal Reserve Bank shall be permitted to discount for any member bank "bankers' acceptances" as hereinafter defined up to an amount not to exceed the capital stock and surplus of the bank for which the rediscounts are made.

The Federal Reserve Board has determined that, until further order, to be eligible for discount under section 13, by Federal Reserve Banks, at the rates to be established for bankers' acceptances:

(a) Acceptances must comply with the provisions of Paragraph II (a), (b), (c) hereof.

(b) Acceptances must have been made by a member bank, non-member bank, trust company, or by some private banking firm, person, company, or corporation engaged in the business of accepting or discounting. Such acceptances will hereafter be referred to as "bankers,” acceptances.

(c) A banker's (foreign) acceptance must be drawn by a purchaser or seller or other person, firm, company, or corporation directly connected with the importation or exportation of the goods involved in the transaction in which the acceptance originated, or by a "banker." The bill must not be renewed after the goods have been surrendered to the purchaser or consignee, except for such reasonable period as may have been agreed upon at the time of the opening of the credit as a condition incidental to the importation or exportation involved, provided that the bill must not contain or be subject to any condition whereby the holder thereof is obligated to renew the same at maturity.

(d) A banker's (foreign) acceptance must bear on its face or be accompanied by evidence in form satisfactory to a Federal Reserve Bank that it originated in, or is based upon, a transaction or transactions involving the importation or exportation of goods. Such evidence may consist of a certificate on or accompanying the acceptance to the following effect:

"This acceptance is based upon a transaction involving the importation or exportation of goods. Reference No. Name of acceptor

(e) Bankers' acceptances, other than those of member banks, shall be eligible only after the acceptors shall have agreed in writing to furnish to the Federal Reserve Banks of their respective districts, upon request, information concerning the nature of the transactions against which acceptances (certified or bearing evidence under IV (d) hereof) have been made. A bill of exchange accepted by a "banker" may be considered as drawn in good faith against "actually existing values," under II (c) hereof, when the acceptor is secured by a lien on or by transfer of title to the goods to be transported or by other adequate security.

(g) Except in so far as they may be drawn in good faith against actually existing values, as under (f), the bills of any one drawer drawn on and accepted by any firm, person, company, or corporation (other than a bank or trust company) engaged in the business of discounting and accepting, and discounted by a Federal Reserve Bank, shall at no time exceed in the aggregate a sum equal to a definite percentage of the paid-in capital of such Federal Reserve Bank; such percentage to be fixed from time to time by the Federal Reserve Board.

(h) The aggregate of acceptances of any firm, person, company, or corporation (other than a bank or trust company) engaged in the business of discounting or accepting, discounted or purchased by a Federal Reserve Bank, shall at no time exceed a sum equal to a definité percentage of the

paid-in capital of such Federal Reserve Bank; such percentage to be fixed from time to time by the Federal Reserve Board.

To be eligible for purchase by Federal Reserve Banks under section 14, bankers' acceptances must comply with all requirements and be subject to all limitations hereinbefore stated, except that they need not be indorsed by a member bank: Provided, however, That no Federal Reserve Bank shall purchase the acceptance of a "banker" other than a member bank which does not bear the indorsement of a member bank, unless a Federal Reserve Bank has first secured a satisfactory statement of the financial condition of the acceptor in form to be approved by the Federal Reserve Board.

V. POLICY AS TO PURCHASES

While it would appear impracticable to fix a maximum sum or percentage up to which Federal Reserve Banks may invest in bankers' acceptances, both under section 13 and section 14, it will be necessary to watch carefully the aggregate amount to be held from time to time. In framing their policy with respect to transactions in acceptances, Federal Reserve Banks will have to consider, not only the local demands to be expected from their own members, but also requirements to be met in other districts. The plan to be followed must in each case adapt itself to the constantly varying needs of the country.

VI. ACCEPTANCE BY MEMBER BANKS

Any member bank may accept drafts or bills of exchange drawn upon it, having not more than six months' sight to run and growing out of transactions involving the importation or exportation of goods up to an amount not exceeding the capital and surplus of such bank, provided that—

1. Every such bank shall possess an unimpaired surplus of not less than 20 per cent of its paid-in capital.

2. Every such bank shall file formal application with the Federal Reserve Bank of its district, which shall report to the Federal Reserve Board upon the standing of such applicant, stating also whether the business and banking conditions prevailing in the district warrant the granting of such applications in said district.

3. Every such application shall first have been approved by the Federal Reserve Board.

Approval of any such application may be rescinded, and modifications of this regulation may be made, by the Federal Reserve Board upon notice of 90 days to the bank or banks thereby affected.

154. DOMESTIC ACCEPTANCES PROVIDED FOR1 The appended regulation is intended to cover the purchase in the open market, not only of bankers' acceptances based on the importa1 Adapted from Federal Reserve Board Circular No. 19, November 29, 1915. Paragraph numbering has been changed in attempting to avoid duplications in Circulars Nos. 18 and 19. See selection No. 153.-EDITOR.