sale of acceptances. They study the credit quahty of the acceptances on the market, make an appraisal of their value, standardize the paper, and promote the assemblingof adequate commercial capital for the discount market.
The chief customers of acceptance dealers are the banks, probably two-thirds of their sales being made to commercial banks, 10 or 15 per cent to corporations and individuals, and
still less to savings banks. Sales outside the metropolitan area are largely made to banks in the larger cities, but this market hasbeen buthttledevelopedasyet. Inthe largecitiessalesmen peddle the paper, whereas the out-of-town business is done through branch houses, correspondents, circulars, telephone, telegraph, etc. Daily offering sheets are sent to the principal customers.
Avery largeproportion of the capital required to purchase and hold acceptances for sale is procured by borrowing from bankswith which the dealers establish intimate relationships.
This money is borrowed on call, the call rate of interest being generally lower than the timerate, and call moneybeing more adaptableto the varying needs of thedealers than timemoney, which would have to be utilized continuously. Obviously the
more capital the dealer has ofhis own thegreater is his ability to hold acceptances when the market runs against him andnot beforced to sacrifice them.
Advantages of DiscountMarket toBanking System
Theadvantagesofa discountmarkettothebankingsystemof the United States comprise thefollowing:
I. The loan fund of the discount market tends to comprise the available reserves of the country. The temporarily im- employed fundsof commercial, investment, private, andsavings banks, trust companies, insurance companies, corporations, trustees, brokerage houses, discount companies, and private
investors of thewhole country,and some fromabroad,contribute to this fund. The fund becomes so large that its percentage variations are small, although it does vary seasonally. The banker and business man are normally sure of getting accom- modation on thediscountmarket.
2. Thisfundismobile. Itcan beshiftedfrom one endofthe country to anotherina fewhours. Onefederalreservebankcan Hquidatelarge holdingsof discountpaper to another, and adjust
payment through the gold settlement fund. A member bank
may liquidate its discounts by rediscounting with its federal reserve bank. This inter-regional shifting of funds is achieved without thetransportation ofcurrency.
3. This process of rediscounting as between member and
federal reserve banks, and as between federal reserve banks, tends to equalizediscountrates. Thediscountingtendstooccur where the discount rates are lowest, and this tends to raise the rates thereand torelieve thedemand elsewhere. The same sort of equalization takes place among parts of a federal reserve districtasamongthefederalreservedistricts. Theoperationsof note-brokers alsopromote this equalization.
4. The discount market also equalizes discount rates as be- tween foreign countries and the United States. Acceptances become an international investment. If discount rates are low
inNew Yorkit isagoodplace tosellpaper,butiftheyarehighit isagoodplacetobuypaper. Suchsellingand buying byforeign- ers tends to raiseandlower the discountrates, respectively, and
to bringthe ratesin thetwo countries into equilibrium.
5. The discount market tends to control gold shipments, decreasing the amount and frequency of such shipments. If
exchange in London on New York goes low, the English take advantageof thelow exchange andpurchase acceptancesin New
York, and American banks sell their holdings of foreign bills to take advantage of the high sterling rates. Later when the reverse conditions exist as to exchange rates, the reverse oper-
COMMERCIAL PAPER AND DISCOUNT MARKET 101 5
ations take place. The excess funds in one of the markets are not, therefore, shipped to the other, but find temporary invest-
mentinthe discountmarket,andthe expensiveshipmentofgold
isunnecessary in themajority of cases,
6. Thediscountmarketperforms the common functionof all
markets, thatis, it brings buyer and seller together, and diverts the loan fund to the commodity, area, and user that has the greatestneedforit.
7. Eventuallythediscountmarketwillprobably supplantthe call-loanmarketforthetemporaryinvestmentoffunds,relieving the commercial banks from their dependence upon the stock marketforsuchinvestmentandtendingtoseparate thecommer-
cialandinvestment markets.
8. The discount market will provide a better buffer against panic than the call-loan system does. The defense of the gold reservesofthebanksofthecountryagainst the necessityof ship-
ment abroadisvery important,sinceevery golddollaristhe basis of a credit structure of many dollars and every dollar exported reduces thepotential creditofthe bank many fold.
The wantofadiscountmarkethas deprivedus of the bufferof commercial investmentswhichprotectsbankreserves inEurope.
To defend its gold reserve the American bank's usual plan has been to raise its call and other loan rates, causing liquidation and restraining borrowing. The stock- or bond-secured call loan, which in America approximates most nearly the accept- ance in the London discount market as regards convertibility, hasprovedunsatisfactory,becauseingreat emergenciesit cannot be converted withoutprecipitatingapanic. Although European banks invest freely in call loans based on commercial paper collateral, theyloanonly to alimited extentat callwhen stocks and bondsare offered as security. They have been reluctantto invest in call loans unless thedisparity of rates was very high.
But with a well-developed and broad discount market in New
York, basedonacceptances, the federal reservesystem should be
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I0l6 DOMESTIC BANKING— EARNING ASSETS
able, by raising its rate for acceptances abovetheLondonrate, to attract European funds to New York, normally and without special arrangement, and relieve any stringency. Formerly a relatively smaller difference of rates between London and Paris than between London and New York caused the shift of a con- siderable volumeoffunds to the place oflowest rate. The flux
was freer, forParis investors knew they had an assured market
in London, and vice versa; the wider the disparity of rates the
more rapidly was the opportunity embraced and the greater the
movementoffunds.
If a bank invests its surplus funds in readily discountable paper it is in a position to meetits foreign balances by offering claims upon bankers in the foreign countries with which such creditorsare trading.
[Incasethe discount]rateshouldnotproveeffective in attract- ing funds, reliefwould come in other ways. The agencies of foreignbankshere whichhad billsin their portfolioswould be restrained by the higher ratefrom offeringthem for discount.
Sellers ofgoodsindistant countries wouldsoon find itcheaper to draw on London than on New York, and within a few monthsthevolumeinourdiscount market would substantially decline and the volume in the London discountmarket would increase by an equivalent amount, the effectbeingtothrowoff
upon the London market credits which had hitherto been carried in New York. This would have the same result as though foreign funds were attracted here for investment.
The financial money market would therefore be defended
[/ againstpanicbyaworld-widebufferofcommercialcapital.
Rediscounts with the FederalReserve Banks
TheFederalReserve Actprovidesas followsforrediscounts
by memberswith the federal reserve banks
Upontheindorsementofanyofitsmemberbanks,whichshall bedeemedawaiverofdemand,noticeandprotestbysuchbank