In order to present both sides of the question on the use of trade acceptances, the following letter written by the assistant treasurer of a large manufacturing company in the United States is given. It should not be construed that the acceptance method is impracticable for similar lines of business, as the letter merely expresses a viewpoint as to its limitations. The last paragraph contained in this letter tells the story. However, it has been found in the past, and bankers and large business houses have testified to the fact, that it is the larger corporations, the resources of which are tremendous and which do not require borrowing, doing business on practically a cash basis, that find very little use for the trade acceptance. These large corporations do not care to give any trade acceptances for they virtually control the situation. In a letter received by the Institute, another manufacturing firm states that it is due to these larger corporations that the acceptance method, which is conceded by the highest commercial and financial interests of the country to be of most good, is retarded in its development. This firm states that activities directed to the development of the acceptance method should start with these firms first.

As you know, we are definitely committed to the granting of an unusually large cash discount. Our 5 per cent, cash discount, which is a part of our terms for all branches of our line, is equalled only by the cash discount granted on a few special lines in the garment field. You are familiar with the reasons for the granting of this unusually large cash discount. Since we are dealing largely with merchants of limited capital, we do everything that we can to make a man turn his capital often.

The primary purpose of the trade acceptance movement is to expand the credit structure of the nation. Of course this expansion does not in any way increase the actual amount of wealth. What we strive to do with our long cash discount is to make a man turn his capital frequently and it follows that every time that he turns his capital and makes a profit it is producing wealth.

From the standpoint of the national interest in the present emergency, it has been held by a dozen or more of the country's largest bankers, to whom our particular problem has been submitted in detail, that we serve the country better by making our customers' dollars work overtime than we would by deferring payments and lengthening terms, in accordance with the trade acceptance plan.

Looking at this question from a standpoint solely of the interests of the......Company, there are several things to be considered: First of all, the acceptance plan has been devised to assist the man whose results in handling open accounts have been just average, or less than average. It so happens that our results, over a period of years, have been very much better than the average. Our accounts receivable are not uncertain; our losses are negligible; our cash discount terms are enforced in all of our dealings with all of our customers. If we are to put into operation a system, which is planned to bring up the man who has been getting poor results to a level where he can expect average returns, we actually will have to bring ourselves down to a lower level than that upon which we have been doing business. This is just a matter of mathematics. We are not taking credit to ourselves, because our collection results have been exceptionally good (we know that they can be better), but we do not care to lose any of our "punch" merely because a lot of other fellows have slow accounts and cannot enforce cash discount terms.

If we were to make a general use of trade acceptances, we probably could discount those acceptances and in this way borrow money at a figure slightly under the current market rate for single name paper.

At the same time, if we did this we would be merely borrowing money on the name of...... Company, so far as most of the acceptances might be concerned, because we have very few customers whose names on the pieces of commercial paper would mean anything as a basis for borrowing from our banks in New York, Philadelphia, Boston, or Chicago.

Furthermore, it would be necessary to create a special department to handle these acceptances. The maintenance of such a department would represent a considerable item of expense. It would also be necessary to set up and to keep up a reserve to pay discounted acceptances which our customers did not meet when they came due. The interest on this reserve alone would more than eat up the slight saving in the cost of borrowed money secured on acceptances.

It must be borne in mind also, that if we were to use acceptances regularly throughout the year, we would face a necessary lengthening of our terms. We could not profitably arrange to discount and rediscount customers' paper which would run for less than 60 days. This would react directly upon the Credit Department, because, instead of being in a position to shut off upon a man when he did not take advantage of his cash discount for a single month's purchases, our cash discount would be eliminated and we would have no excuse for shutting off deliveries until a man failed to meet his first acceptance at the end of 60, or possibly even 90 days.

The credit men also would face the problem of handling customers who would give acceptances, sincerely believing that these acceptances represented cash and actually paid their accounts. For example, a dealer, with a credit limit of $5,000 would order $5,000 worth of goods from us, under the dating proposition, in January and would give us an acceptance for $5,000 when the goods were delivered. It would be a very difficult thing for us to convince that dealer that by giving us his name on a piece of paper he had not actually paid his bill. If he were to give us an acceptance, it would be nothing more than natural for him to expect to come right in to order and receive another $5,000 worth of goods on open account. Of course the acceptance would merely serve as a basis for borrowing and the transaction would produce no money except such money as the......Company would borrow and pay for. The customer's account would not be settled until the acceptance cleared at his bank on the due date. If, after taking his $5,000 acceptance we were to give him another $5,000 worth of goods on open account, we merely would be doubling his limit without any sort of security.

From the standpoint of the......Company alone, therefore, the use of the trade acceptance would involve additional operating detail and additional expense, with an actual slowing up of our collection methods and an increase in risks.

From the standpoint of the salesmen in the field, the trade acceptance is a mean thing to handle, because at the time he takes the order the salesman is compelling the buyer to think definitely and specifically about paying the bill. The chances are if an order is taken for a thousand dollars and then the salesman asks the customer to sign an acceptance for a thousand dollars, that in many cases the customer will wish to be on the safe side of things and will actually cut down the amount of the order placed with us. Further, if we are to place upon the salesman in the field the burden of explaining a trade acceptance plan to customers, we are going to make it necessary for him to spend a good part of his time selling this part of the program to customers - the time which might otherwise be devoted directly to producing orders.

When the proposition is viewed from the standpoint of the customer, there is just one question to be asked and answered. Why should any customer who has regularly discounted his bills, give to the ......

Company a trade acceptance, unless conditions have so changed that we actually need that customer's assistance in financing his purchases through a dating period? When we ask the customer for an acceptance, we give him nothing in return for it - it is just an additional consideration that he is showing us. If we are dealing with customers who live up to the contracts that they make and if we see to it that they do live up to these contracts, the acceptance would give to the customer nothing that he does not already have, and, as many customers will persist in viewing it, would be merely requiring the customer to give some form of "security" as a guarantee that he will pay his bills when he says he will. If a customer always has maintained a clean discount record with us it would be a little bit hard for him to figure out why we should require, at the present time from him, more than we have in the past.

We believe that the trade acceptance is an excellent thing for the concern of limited capital doing business with established corporations, whose names on acceptances will be a direct addition to the borrowing power of the people to whom the acceptances are given. We believe in acceptances for houses selling goods on very long terms to customers who are not in the habit of paying promptly, also for houses that have found open accounts to be "a very uncertain thing" and for those houses who experience great difficulty in enforcing cash discount terms.