vides as follows with regard to the power of national banks as members of the Federal Reserve System to accept drafts or bills of exchange: "Any member bank may accept drafts or bills of exchange drawn upon it having not more than six months' sight to run, exclusive of days of grace, "I. Which grow out of transactions involving the importation or exportation of goods; or "II. Which grow out of transactions involving the domestic shipment of goods provided shipping documents conveying or securing title are attached at the time of acceptance; or "III. Which are secured at the time of acceptance by a warehouse receipt or other such documents conveying a securing title covering readily marketable staples. "No member bank shall accept, whether in a foreign or domestic transaction, for any one person, company, firm, or corporation to an amount equal at any time in the aggregate to more than ten per centum of its paid-up and unimpaired capital stock and surplus, unless the bank is secured either by attached documents or by some other actual security growing out of the same transaction as the acceptance; and "No bank shall accept such bills to an amount equal at any time in the aggregate to more than one-half of its paid-up and unimpaired capital stock and surplus: "Provided, however, that the Federal Reserve Board, under such general regulations as it may prescribe, which shall apply to all banks alike regardless of the amount of capital stock and surplus, may authorize any member bank to accept such bills to an amount not exceeding at any time in the aggregate one hundred per centum of its paid-up and unimpaired capital stock and surplus: "Provided, further, that the aggregate of acceptances growing out of domestic transactions shall in no event exceed fifty per centum of such capital stock and surplus. "IV. Any member bank may accept drafts or bills of exchange drawn upon it having not more than three months' sight to run, exclusive of days of grace, drawn under regulations to be prescribed by the Federal Reserve Board by banks or bankers in foreign countries or dependencies or insular possessions of the United States for the purpose of furnishing dollar exchange as required by the usages of trade in the respective countries, dependencies, or insular possessions. "Provided, however, that no member bank shall accept such drafts or bills of exchange referred to in this paragraph for any one bank to an amount exceeding in the aggregate ten per centum of the paid-up and unimpaired capital and surplus of the accepting bank unless the draft or bill of exchange is accompanied by documents conveying or securing title or by some other adequate security: "Provided, further, that no member bank shall accept such drafts or bills in an amount exceeding at any time the aggregate of one-half of its paid-up and unimpaired capital and surplus." The National City Bank in its booklet on "Bank Acceptances" gives the following illustrations of the use of bank acceptances arising out of a transaction involving the importation or the exportation of goods, acceptances arising out of domestic shipment transactions, acceptances which are secured by warehoused goods and drafts drawn for the purpose of providing dollar exchange. An Importation Acceptance. An importer desires to purchase some raw silk in Japan. He goes to his bank and explains the transaction. His credit standing being satisfactory, his bank issues, at his request, a commercial credit. This credit authorizes the Japanese exporter to draw on the bank for the value of the silk which the importer is purchasing. The credit limits the total amount of drafts which may be drawn under it, states that they must be drawn and negotiated on or before a certain date, and gives the usance; that is, that the drafts must mature thirty, sixty or ninety days, or whatever the period may be, after sight. It also stipulates what documents (shipping, insurance, etc.) must be attached to the drafts. Since the importer wants to get his silk, there is not, ordinarily, time to wait until the credit has reached the exporter through the mails. Usually, therefore, the information is cabled through a bank located in the vicinity of the exporter. Upon receipt of this advice the exporter prepares his raw silk for shipment. As soon as he is in possession of the ocean bill of lading and other necessary documents he draws a draft on the bank in this country issuing the credit for the value of the silk, the draft having a maturity in accordance with the terms of the credit-let us say ninety days after sight. To the draft he attaches the documents referred to. He then takes the draft to his local bank, which purchases the draft at the current rate of exchange for ninety-day-sight dollar bills. The shipping and other documents are all made out or indorsed so as to give the bank purchasing the draft title to the goods. The bank in Japan now forwards the draft and documents to its agency or correspondent in this country. The papers are all presented to the bank issuing the credit. If it finds everything in order, it accepts the draft, returning it to the party presenting it. The shipping and other documents are retained to be surrendered to the importer, probably in exchange for a trust receipt, to enable him to get his raw silk. The importer thus has ninety days in which to secure the raw silk and dispose of it before he is required to place his bank in funds to meet the maturing draft. The representative of the Japanese bank sells the acceptance in the open market at the prevailing rate for ninety-day bills. For making this transaction possible the importer's bank charges him a small commission for accepting the draft. Only credits issued by the well-known banks, of course, will be acceptable to the exporter, as he wants a bill which will command the best rate. This business is, therefore, usually handled by banks in the larger centers. The lesser-known institution usually has credits required by its importers, issued by one of its large correspondents, under the guarantee of the smaller bank. An Exportation Acceptance. An exporter here is negotiating for the sale of shoes to a firm in Argentina. He is not willing to ship the shoes and draw a draft direct on his customer, nor is he willing to sell him on open account. It is therefore necessary for the purchaser to finance the transaction by means of a banker's credit. The purchaser goes to his bank in the Argentine and asks it to arrange a credit with its correspondent in the United States to cover the value of the shoes. The Argentine banker, knowing that the purchaser is a satisfactory credit risk, requests his correspondent in this country to issue the credit. The Argentine banker guarantees that the bank issuing the credit will be placed in funds before the maturity of any draft drawn on it under the credit. The bank here then advises the exporter that, as requested by the purchaser, it will accept his drafts drawn on it up to a certain amount when the drafts are accompanied by the documents mentioned in the Letter of Credit. These documents, of course, must represent the shoes which have been shipped. The credit also probably states that it expires on a certain future date, thus making it necessary for the exporter to complete his end of the transaction within a reasonable time. As soon as the exporter secures his necessary shipping and other documents he draws a draft on the bank here issuing the credit, having a maturity in accordance with its terms, for the value of the shoes. The exporter presents the draft and documents to the bank issuing the credit. Everything being as stipulated in the credit, the bank accepts the draft and returns it to the exporter, who sells it in the market and thus receives payment for his shoes. The documents are forwarded to the bank requesting that the credit be opened, and are probably released by them to the purchaser. The Argentine bank, through remittances, or by charge against its balance in this country, places its correspondents in funds to meet the draft at maturity. Acceptances Arising Out of Transactions Involving A manufacturer, desiring to finance his purchases of raw material through the medium of bankers' acceptances, requests his bank to issue a credit in favor of the people from whom he is purchasing. The credit should be for an amount not exceeding, of course, the value of the goods being purchased. The drafts might have a usance which would give the purchaser time to make up the raw material and sell the manufactured product. This maturity shoud not, however, exceed ninety days, as bills with a longer maturity do not have as ready marketability. This arrangement being satisfactory to the seller, he will ship his goods, draw a draft for their value on the bank issuing the credit, and forward the draft and shipping documents to the bank. It must be borne in mind that the shipping documents must be so issued or indorsed as to give the bank title to the goods. The bank accepts the draft and returns it to the shipper, who disposes of it at the prevailing discount rate. The documents are turned over to the manufacturer, probably under a trust receipt, and he is enabled to secure his raw material, manufacture and sell his goods. Before maturity he is required to place the bank in funds to meet the draft. Acceptances Which Are Secured by Readily A clothing manufacturer, for example, desires to carry his stock of wool through the use of banker's acceptances. He places the wool in a warehouse, draws a draft on his bank for the value of the wool, attaching the warehouse receipts as collateral. The draft, after acceptance, is returned to him to be sold, the warehouse receipts being retained by the bank. The wool must be stored in a warehouse which is independent of the manufacturer; that is, the manufacturer must not have any control of the wool as long as the warehouse receipts are outstanding. It is, of course, possible to secure possession of the original warehouse receipts by substituting other warehouse receipts for wool, but if the manufacturer desires to take down wool without substitution he should give the bank the cash value of the wool taken, for the bank should be secured either by warehouse receipts or cash all the time its acceptance is out. Drafts Drawn for the Purpose of Furnishing Dollar It sometimes happens that persons in foreign countries having obligations to meet here are not able to secure dollar ex |