The bulk of these acceptances were by member banks, as is shown by the following figures for regular report dates:

Regulation C, Serics of 1924, issued August 15, 1924, supplements the provisions of section 13, paragraphs 6 and 11. Together with the Board's rulings, they govern the present exercise by members of the acceptance power conferred by the Act. National banks must be distinguished from member state banks. A national bank derives its power to accept solely from the Reserve Act, and is therefore limited both as to character and scope of its acceptance powers by the express and implied limitations of the Act. A state bank member is not authorized to accept unless such authority is conferred by its charter or the laws of the state in which it is operating. The powers so conferred upon it as to kinds of acceptances are not altered or abridged by the Reserve Act, except as regards aggregate amount of acceptances, and amount accepted on behalf of one customer.3

Several classes of acceptances may be created. Article B of regulation C, dealing with acceptance of drafts or bills of exchange drawn for the purpose of creating dollar exchange, will be considered later. Article A covers acceptances arising in the following cases:

* 1923 Bulletin, p. 316; Digest, XIII-E, 111 (5), p. 51,

1. Importation and exportation of goods, including shipments between foreign countries.

2. Domestic shipment of goods.

3. Domestic storage of readily marketable staples.

The Acceptance Council classifies acceptances outstanding as follows: CLASSIFIED OUTSTANDING ACCEPTANCES, 1923, 1924, 1925

Before taking up the second and third groups in detail, the general restrictions applicable to all may be set forth.*

*Based on Beckhart, The Discount Policy of the Federal Reserve System, New

York, 1924, p. 163.

Maturities and Renewals

From what has already been said it is obvious that the maturity of the bankers' acceptance is of prime importance. Due to the variation. in individual cases, the Act can undertake merely to set a maximum limit to the period for which acceptances may run. This is six months' sight, exclusive of days of grace, except in the case of those drawn to create dollar exchange, for which a three months' period is specified. No differentiation, however, is made between foreign and domestic acceptances, despite the fact that the former often may well require a longer period. As already suggested, the Act contains the further thought that the individual acceptance should be linked to the specific transaction or operation, hence its maturity should be merely long enough to conclude the operation, but no longer. If made for a longer period, it serves merely to provide working capital for the additional ftime. For domestic acceptances, it should be noted, both security (at time of acceptance) and reference to a specific transaction are required. Acceptance by a member bank against an acceptance agreement which purports to assign to it certain collateral security, but which does not specifically mention any security as assigned, is an ordinary accommodation acceptance, not authorized by law. Accommodation acceptances, whose proceeds are to be advanced to other persons, are not authorized, while the drawer must be an individual, firm, or corporation having some legitimate connection with the underlying transaction, such as buyer or seller or owner of the goods involved.

To what extent the principle is actually carried out depends upon the Board's rulings in specific instances submitted to it and the general practice of member banks, which will be discussed in the following pages. The only other general ruling of the Board has been an opinion that the drawing of bills "on or before 90 days after sight" should be discouraged, since a bank ought to accept for a definite period, otherwise the acceptance becomes in effect a limited demand note or, rather, a certified check to be presented within a limited period of time.

7

It should be noted that this discussion does not concern the agreement under which acceptances are created, but only the actual acceptances themselves. The former raises the entire question of syndicate credits, under which a group of banks agree to accept to a specified amount and may even discount the acceptances among each other. The technical problems and methods of operation will be considered

Yet the committee of national bank examiners in 1922 reported a case where an acceptance had been drawn to cover a motor truck shipment in a city taking about 30 minutes in all.

1918 Bulletin, p. 311; Digest, XIII-E, 107, p. 49. '1917 Bulletin, p. 949; Digest, XIII-C, 710, p. 40.

later. National banks may agree in advance to accept drafts aggregating certain amounts for a period of more than six months, but each individual draft must comply with the provisions of the law relating to the acceptance of the original draft. A member bank cannot agree unconditionally to accept a renewal draft, but can agree to accept only in case the renewal draft is eligible for acceptance under the terms of the Act. The renewal draft is tested by the terms of the Act and the Board's rulings and regulations applicable to the original acceptance.10 Other than in connection with acceptance agreements, renewal drafts in fact should be rare, for in general the credit is understood to be self-liquidating within the period for which the bills are drawn, yet excessive renewals have by no means been unknown in American practice.

11

A number of instances may be cited at this point in which the Board has paid specific attention to the concrete financing needs involved. It has ruled that a borrower should not draw 90-day drafts against warehoused readily marketable staples under contract for sale and delivery at a remote period, such drafts in order to carry the goods pending delivery being subject to renewal for 90 days. A renewal agreement should not be used where a six-months period is sufficient to cover all reasonable contingencies in the orderly marketing of the staples; if the borrower needs funds for more than six months, he should use his direct note. Again, a national bank cannot renew 90-day drafts to finance importation of automobile parts from France, their warehousing here and subsequent sale from storage, when the drafts mature after arrival and storage but prior to resale. The goods have come into the possession of the taker of the credit in the United States, hence the import transaction is concluded. On the other hand, drafts cannot be accepted merely against the commodities in storage, since they are not readily marketable staples. In short, the eligibility of renewal drafts depends upon the stage of the transaction at the time the renewal drafts are drawn.1 12

Aggregate Acceptance by One Institution

Foreign banks, as a result of experience, had avoided over-heavy aggregate acceptance commitments, both as a matter of safety to the

1915 Bulletin, p. 269; Digest, XIII-E, 500, p. 66; 1920 Bulletin, p. 66; Digest, XIII-E, 602, p. 68.

1921 Bulletin, p. 964; Digest, XIII-E, 605, p. 69.

10 1915 Bulletin, p. 269; Digest, XIII-E, 500, p. 36; 1920 Bulletin, p. 66; Digest, XIII-E, 602, p. 68.

1920 Bulletin, p. 277; Digest, XIII-E, 603, p. 68.

1921 Bulletin, p. 699; Digest, XIII-E, 604, p. 69.

individual institution and because of the discrimination made in the market at least through increase of rate, if not by actual reluctance to purchase against those institutions whose acceptances were offered too freely. Likewise, foreign banks had learned to spread or diversify their risks, avoiding too heavy undertakings on behalf of any one interest. But such forbearance could hardly be expected from American bankers if left to themselves until a process of trial and error had shown them the proper course, and in the meantime the bank acceptance might well come to be discredited. Accordingly the Act endeavored to limit banks in both of the ways indicated.

At present, a bank may accept bills up to an aggregate at any time of one half of its paid-up and unimpaired capital stock and surplus, which was the normal prewar acceptance liability of the British joint-stock banks. The Board, however, possesses the power to approve an increase in the amount to 100 per cent, but the aggregate growing out of domestic transactions may not exceed 50 per cent. In other words, a bank may accept up to 50 per cent, and, with the Board's permission, an additional 50 per cent, making 100 per cent in all. Up to 50 per cent may be domestic acceptances, and the balance of the 100 per cent foreign acceptances. This limitation does not refer to creation of acceptances to provide dollar exchange, of which an additional aggregate of 50 per cent is permitted under certain conditions (see chapter XIX). It may be noted that prior to 1913 the great English joint-stock banks had usually outstanding an amount distinctly below their capital and that the Board was first empowered to increase the amount to 100 per cent by the amendment of March 3, 1915.

The Board has determined to limit the 100 per cent acceptance power to members having an unimpaired surplus equal to 20 per cent of paidup capital. While the procedure does not differ from that followed in granting other special powers, it may be sketched as follows:

1. The bank files an application with the Board, which must be forwarded through its district reserve bank.

2. The reserve bank reports to the Board upon the applicant's standing, and also states whether district business and banking conditions warrant granting the application. The Board must be satisfied on both these matters.

The approval of any application may be rescinded upon 90 days' notice to the bank affected. A bank once granted permission to accept up to 100 per cent need not obtain additional authority from the Board each time it increases its surplus.13 At the close of 1924 there were 247 banks which possessed the power to accept to 100 per cent.

The query naturally arises, how should a bank treat its own acceptances which it has purchased before maturity? While not regarded as 13 1919 Bulletin, p. 143; Digest, XIII-E, 802, p. 73.