Prime bank acceptances are especially desirable as an investment because they combine in a degree not found in any other commercial instrument the three important factors of safety, short maturity, and ready convertibility into cash.

Safety

When a bank accepts a draft it has created an obligation which it must, if it is to retain its standing, pay at maturity. The acceptance of a bank is as good as the bank itself, ranking with its cashier's check or certificate of deposit. But the drawer and indorsers of an acceptance are also liable, providing it is not paid at maturity and is properly protested. If one is satisfied that the funds he has deposited in his bank are safe, he can certainly find no objection from the standpoint of security to purchasing the acceptance of that same bank, or of another bank equally as good or better.

England, which heretofore has financed the foreign commerce of the world, has been enabled to do so largely because her hankers have purchased large amounts of acceptances and have Loaned enormous sums at very low rates to dealers to enable them to carry hills. Their long experience has shown them that prime acceptances are the safest st short-term investment they can find.

Our prime acceptances are just as good as those which have proved so satisfactory in England, and possibly better, because an eligible acceptance here is against a shipment of goods or is secured by goods; the only exception being bills for dollar exchange, in which case the) are drawn by a bank and accepted by a bank.

Maturity

Few acceptances appear in this market having a maturity longer than four months. The great majority are drawn payable ninety days after sight. Within these limitations the investor can usually secure in the market bills approximating any maturity he may desire, whether it be for only three or four weeks or for the longer period. We have no other form of investment which can compete with acceptances in this respect.

The two features just mentioned make prime acceptances especially fitted as an investment for funds of corporations, firms or individuals, being accumulated for a special purpose, which will be paid out within a short time, such as funds for the payment of a dividend.

Convertibility Into Cash

Under the provisions of the Federal Reserve Act, the various Federal Reserve banks may purchase acceptances in the open market. The acceptances must, of course, be eligible; that is, must arise out of one of the four kinds of transactions mentioned heretofore.

As will be seen, the acceptance of any National bank is eligible. Non-member banks and bankers may make their acceptances eligible by filing with the Federal Reserve Bank a statement of financial condition, in form to be approved by the Federal Reserve Board. They must also agree in writing with the Federal Reserve Bank to inform it, upon request, concerning the transactions underlying their acceptances. Acceptances which the Reserve banks cannot purchase or rediscount are termed ineligible, and do not command as favorable a rate in the market as eligible bills.

The figures in any number of the Federal Reserve Bulletin will show the large volume of acceptances which have been purchased by the various Federal Reserve banks. This power to purchase and willingness on the part of the Federal Reserve banks to do so, as evidenced by the extent of their transactions, make a prime eligible acceptance in the hands of a member bank the most liquid investment that bank has. A member bank desiring to dispose of the acceptances of other banks which it holds, indorses those acceptances and sells them to its Federal Reserve bank at the prevailing rate for the purchase of acceptances. It should be noted that bank acceptances are sold to the Federal Reserve banks, not rediscounted. The purchase rates for prime indorsed bills are usually below the rediscount rates for paper. The nearer the acceptance approaches maturity the more favorable rate it commands at the Reserve banks.

The non-member bank, corporation or individual desiring to dispose of acceptances before maturity has always been able to do so to dealers in the open market, and ordinarily at very little difference from the rate at which the bills were purchased. In this connection it must be remembered that acceptances are discounted for the number of days they have to run from date of sale until maturity.

Bank acceptances are often drawn for odd amounts, representing the value of a shipment. They vary in size from a few hundred dollars to several hundred thousand dollars. It is, therefore, usually possible for an investor to purchase approximately any amount he may desire.

Acceptance Of Drafts By State Bank Members

The Federal Reserve Board is without authority to permit a member bank to accept drafts drawn against it in domestic transactions in excess of 50 per cent, of the capital and surplus of the accepting bank. It may authorize a member bank to accept drafts up to 100 per cent., which amount may include both those which grow out of transactions involving the exportation or importation of goods and those which

Eligibility For Rediscount Of Member Bank Acceptances

Under the terms of section 13 any draft or bill of exchange which a member bank has the power to accept under the provisions of that section, is technically eligible for rediscount by a Federal Reserve Bank. This does not mean, however, that Federal Reserve Banks are required by law to rediscount every such acceptance tendered to them for that purpose. In developing a general market for acceptances the Federal Reserve Banks are necessarily called upon to carry a large amount of this class of paper, but it is important that the Federal Reserve Board and the Federal Reserve Banks should take all necessary steps to insure conservatism in the exercise of the acceptance power by member banks. The policy of the Board, therefore, as reflected in its various rulings, has been to caution Federal Reserve Banks that in rediscounting drafts accepted in domestic transactions they should consider, and in many cases investigate, the circumstances under which the draft was accepted in order to determine whether or not the particular transaction complies with the spirit was well as the letter of the statute.