The establishment of a broad market for commercial paper would be greatly facilitated by legalizing the bank acceptance. By the decision of the courts national banks have not been permitted to accept time bills of exchange. The bank acceptance as a device for the extension of credit is very widely and successfully used in foreign countries. A borrower desiring a sixty or ninety day loan draws a bill on a bank which accepts it under some mutually satisfactory arrangement. Such a bill is at once salable wherever the accepting bank is known, and the drawer is able to obtain funds without delay. The legalization of acceptances would not only provide a broad market for commercial paper, but would also enable business concerns to borrow at lower rates. In Europe bankers' bills command the lowest rate of any form of bank paper. If banks were permitted to accept time bills country banks, instead of buying commercial paper through note brokers, which is attended with some risk and which ties up their funds for a considerable time, could invest in paper backed by the credit of some powerful bank of whose standing there is no question. More important, however, is the fact that with a national discount market these bank-accepted bills could always be promptly converted into cash when the banks holding them needed money to meet an emergency.
The prohibition of bank acceptances has not only been a hardship to the banks, but it has also handicapped our merchants engaged in domestic and foreign commerce. Without a national discount market most of our merchants and manufacturers have been excluded from the benefits of foreign competition for their paper and are confined in their borrowings to American capital. However low discount rates may be in Europe, they pay the current local rates for money. Without the facility of bank acceptances we have been at a distinct disadvantage in our foreign trade. An English importer arranges with his bank for the acceptance of sixty or ninety days' sight bills drawn upon it by an American shipper. The latter sells the bills to a New York bank and receives immediate payment. The New York bank forwards the bills, with the shipping documents attached, to its London correspondent which presents them for acceptance to the bank on which they are drawn. The bill of lading is then turned over to the importer according to whatever arrangement has been made between him and his bank. The accepted bills are discounted in London by the New York bank, and against the credit thus established it can immediately sell sterling exchange. The New York bank can afford to pay a high rate for such bills as they are drawn on responsible bankers thus assuring payment at maturity. In the past the American importer, unable to make this kind of arrangement with his bank, has been compelled to finance his foreign purchases either by negotiating a loan and remitting the funds direct to the shippers, or by having the shippers draw on him, turning the draft over to their banker to be sent to a New York bank for collection. This shifts the burden of providing funds to finance the transaction upon the foreign shipper who consequently can exact terms favorable to himself through price adjustments. Either method open to the American importer is expensive as compared with the use of bank acceptances common in other countries.
Our system of decentralized and independent banking has failed to meet the needs of international operations. It has lacked the unity of policy necessary to finance the export of merchandise, to deal on equal terms with foreign banks in international exchange, or to control international gold movements. In the financing of foreign trade our exporters have had to rely largely upon accommodations at foreign banks or at private banking houses which of necessity work upon a limited scale and without reference to the broader needs of general trade. In the past our national banks have not been permitted to establish branches in foreign countries to supply the American exporter with the kind and the amount of credit needed to meet foreign conditions. Because they could not be sure of rediscount accommodations they have hesitated to tie up any considerable part of their funds in the long-term operations needed in international trade.