volving: The shipment of goods between the United States and any of its dependencies or insular possessions, or between foreign countries; or the shipment of goods within the United States, provided the bill at the time of its acceptance is accompanied by shipping documents; or the storage within the United States of readily marketable goods, provided the acceptor of the bill is secured by warehouse, terminal or similar receipt; or the storage within the United States of goods which have been actually sold, provided the acceptor of the bill is secured by the pledge of such goods."

The advantages arising from the substitution of the trade acceptance for the open book account will accrue not only to the seller but to the buyer and the banker as well. The chief advantages may be briefly stated as follows:

To the seller

1. Completion of the transaction upon acceptance of the draft, and the implied acknowledgment by the buyer of the correctness of the account, thus avoiding or reducing the evils of extensions, counter claims, unearned discounts, return of goods, etc.

2. Elimination of the costly and inconvertible open book account and the substitution of an instrument of credit readily and economically negotiable.

3. Automatic provision of funds necessary to finance each account, thus releasing the seller's own capital for use in the upbuilding of his business in other ways.

4. Substitution for the practice of borrowing on accounts receivable or on single-name paper of the sounder practice of discounting double-name paper convertible at will into cash at much better rates.

To the buyer

1. Improvement of business standing and credit by giving the seller a negotiable evidence of indebtedness with a fixed maturity.

2. Enhancement of credit standing with sellers, by providing them with the means of liquidating sales at preferential discount rates, entitling the acceptor to the best prices and service.

3. Assumption by the buyer of an obligation which must be met at maturity will tend to check the pernicious habit of over-buying.

4. Improvement of buyer's credit, not a reflection upon it, for the acceptance shows on its face that the obligation is made for the purchase of goods. The use of the trade acceptance need not interfere in any way with legitimate cash discounts.

To the banker—

1. Increase in volume of double-name paper, representing current business transactions and not past due accounts, offered for discount in place of single-name paper which is less liquid and often does not represent a commercial transaction at all.

2. Trade acceptances discounted and held by the bank furnish additional reserve, for they are readily rediscountable at the Federal reserve banks at preferential rates.

3. A customer who habitually settles his accounts by trade acceptances is less likely to sell his book accounts, or to borrow through brokers, or to apply to a competitor bank for credit, for his bank if a member of the Federal reserve system can furnish him ample accommodation.

4. The bank is primarily a dealer in credit, and the acceptance system will aid greatly in keeping the credit system sound.

The benefits attending the wide use of the trade acceptance cannot fail to be felt directly or indirectly by the entire business public. A stronger sense of responsibility toward commercial obligations; a check upon over-buying and over-selling; better system in financial arrangements; closer relationship between buyer and seller; reduction of losses from bad debts, of collection expenses, of the abuses of unwarranted discounts, and of the need for borrowing through brokers or on open accounts; the substitution of liquid, double-name paper, based upon actual current commercial transactions for the "frozen" credit of single-name paper; and the release for business requirements of a vast volume of working capital heretofore tied up for indeter

minate periods on the books of manufacturers, jobbers and banks-these advantages will inure to the benefit of the general public, affording an additional safeguard against those periods of business depression which so often in the past have resulted from or have been intensified by the lack of a system of liquid commercial credits.1

59. Other instruments of commercial credit. Other important instruments of commercial credit are the promissory note and the bill of exchange. A promissory note is

a written promise to pay a certain sum of money to the payee on demand or at the end of a definite time. The payee, by indorsing it, may make it payable to a third person, and he in turn may transfer it to a fourth person, and so on. Each indorser makes himself responsible in case the maker of the note fails to pay it when due. In most lines of business the interval between buying and selling stocks of goods necessitates borrowing from the banks. Though the practice of giving promissory notes to cover purchases of goods has declined in this country, it is still common in certain lines of business. Such paper when indorsed by the payee can readily be exchanged for bank credit by being discounted at the bank. It is believed that under the Federal Reserve Act, which provides for the rediscount of commercial paper held by the banks, accept

1 Based largely upon papers on Trade Acceptances, by Chas. W. Dupuis and others.

ances and notes will regain much of their former popularity in business and banking usage.

Some firms have such high credit that they can borrow by offering their own notes for discount. Such notes are known as "single-name paper." If the firm secures the indorsement of some other person or firm, the paper is called "double-name" or "indorsed" paper. When such indorsement is made simply as a favor or an accommodation, and not in consequence of an actual business transaction, the note is called "accommodation paper." Though the accommodation indorser is responsible to a third innocent party in case the original maker fails to pay the note, this class of paper is not highly regarded in banking circles. When a borrower pledges stocks, bonds, or other evidences of property, to add to the personal security of his note, the paper is known as a "collateral note." If a collateral note is not paid when it falls due the bank may sell the securities and reimburse itself from the proceeds. Call loans, that is, loans payable at any time on the demand of either lender or borrower, are usually based on collateral security consisting of stocks and bonds. Such loans are confined largely to stock exchange brokers who are dealing constantly, in securities.

A bill of exchange is a written order by one person to another requesting payment of a definite sum of money. Bills of exchange are of two general classes: foreign and domestic. Legally, a "foreign" bill of exchange is one drawn upon someone living in another state from that of the drawer. In everyday business, however, a foreign bill means one drawn upon someone in a foreign country.1 Domestic bills of exchange, or "drafts," as they are generally called, are either "sight" or "time" drafts. A sight draft is payable on demand; a time draft is payable a certain time after sight or date. The party drawing the bill is called the "drawer" and the person on whom it is drawn, the "drawee.'

1 For a full explanation of foreign bills of exchange, see Chapter XVII.

The following simple illustration will show the use of the commercial draft. Meyer and Co. of Pittsburgh order a bill of goods from J. B. Arnold of New York, and state in their order that upon receipt of the goods in good condition they will "honor" a draft at thirty days' sight for the amount. Arnold draws a sight draft, payable to himself, and after indorsing it he deposits it in his bank. The bank forwards it at once to its correspondent bank in Pittsburgh. As soon as possible after its receipt by the latter, the draft is sent by a runner to the office of Meyer and Co. They honor or "accept" the draft by writing across its face the word "accepted," with the date, the

name of the bank where they wish to make payment, and their signature. The draft is now known as an "acceptance," and is in effect a promissory note. Upon notice from the Pittsburgh bank that the draft has been accepted, Arnold's bank in New York discounts the acceptance and credits his account with the proceeds. If the bank has confidence in Arnold's responsibility it may discount his draft as soon as he deposits it. Meyer and Co. pay the draft at their bank or office when it matures and settlement is made between the Pittsburgh and New York banks, thus completing the transaction. Instead of making the draft payable to himself, Arnold may draw in favor of a third party to whom he owes money. This is known as a