Growth in use of bank acceptances

A bill of exchange drawn by a jobber or manufacturer on account of a shipment of goods and accepted by the buyer—a retail merchant, perhaps—is called a “trade acceptance.” It may happen however, that instead of accepting the bill of exchange on his own account, the buyer will arrange with some bank to accept the bill of exchange on his behalf.

The bank, of course, will be fully protected by the deposit of securities or by some other satisfactory arrangement. The bank gets a small commission for thus lending the use of its name and the buyer may get better interest rates or more favorable terms of sale because he can furnish an acceptance so satisfactory to the creditor.

Such “bank acceptances,” as they are called, have a large and growing use in financing international trade.

In exchange for its customers’ debts, in the form of notes and bills of exchange, the bank gives its own debts in the shape of bank deposits and bank-notes. It will be worth our while to examine these two forms of banking indebtedness rather carefully, for they play a very large part in modern economic life. We are accustomed to think of a bank deposit as “money in the bank.” In fact, however, it is nothing but a claim or credit,—a right to receive money on demand from a bank. A bank deposit is the depositor’s credit or asset and the bank’s debt or liability. It often happens that when some rumor, true or false, has started a run upon a particular bank, the depositors who have stood in line, perhaps for hours, in order to withdraw their deposits before the bank collapses, are perfectly satisfied when they find the bank is able to pay them. They do not want their money, they merely want the assurance that “their money is still there.” Of course this shows a profound ignorance of the nature of banking. No bank could afford to have on hand at any one time cash sufficient to satisfy all of its depositors. A certain amount of cash must be in its vaults or must be easily available elsewhere,—somewhat more than enough to meet the ordinary day-to-day demands of its depositors and creditors. This relatively small amount of cash— 10, 15, or even 25 per cent of the bank’s debts to its depositors—is the bank’s “cash reserve.” The proportion it should bear to the bank’s total deposit debts is regulated in the United States by law, but in many countries it has been found wiser to leave it to be decided by the practical experience of the banks themselves.