Acceptance A New Form Of Short Term Investment

Heretofore we have confined our expressions on the trade and bank acceptance in connection with their usefulness, importance and application to commercial banking, but we have not touched upon the acceptance as a means of investment. With the development of the acceptance method in the United States and with the rapid development of the Federal Reserve System, there has been made available to the investors of this country a new form of short term investment.

Used Extensively In Europe

The acceptance is not a new instrument of credit, having been in use in the leading European nations for a great number of years. So extensive is their use in those countries that they circulate there as freely as do checks in the United States, and are used in the majority of commercial transactions, requiring credit. However well developed a system of banking based upon the acceptance, these European nations have built up, this class of commercial paper is, however, a comparatively new development in the United States. Prior to the passage of the Federal Reserve Act, banks in this country were not allowed to accept drafts drawn on them and payable at some future date. This was due mainly to the lack of knowledge of the acceptance and its advantages both as an investment and as an instrument of credit.

Importance Of The Federal Reserve Act To Acceptances

The provisions and amendments of the Federal Reserve Act are of such importance to the development of commercial banking and acceptances that it is thought best to outline such as are of direct application to the acceptance market. In this country, recognition of acceptances as a sound and highly desirable investment is rapidly following the broadening field of their commercial utility.

Privileges Afforded Banks As To Accepting And Investing

Under the Federal Reserve Act, banks are given the privilege of accepting up to fifty per cent of their capital and surplus, and in special cases, where applications are approved by the Board, such banks may receive the right to accept up to one hundred per cent of their capital and surplus. The Federal Reserve System includes all national banks, many State banks, and trust companies, having acceptance proviliges, both as to acceptances and as to purchases. The present day procedure involved in investing in acceptances outside of direct dealing between buyer and seller is along the following lines:

The Work Of The Commercial Paper Brokers

Above all, it is necessary that intermediaries be established which should bring buyer and seller of commercial paper together. Thus, out of necessity, there have arisen numerous commercial paper brokers and dealers who are in close touch with commercial firms having paper to offer on the market. They are always in touch with banks and financial establishments throughout the country having money to invest. The commercial paper broker or dealer will, therefore, take acceptances from off the hands of the holders and dispose and distribute them according to the needs of the investors. These investors may be either National banks or State banks, trust companies, discount corporations, private investors, corporations, firms, and even in some States, savings banks and trust estates.