number of days or months from the date appearing in the acceptance, or three days later if grace is allowed, as in England. When a banker grants accommodation to a customer by means of an acceptance, he may secure himself in various ways. Ordinarily a banker accepts a customer's draft merely upon his general responsibility, the banker's risk being much the same as if he had discounted the customer's note running a certain length of time. Where the customer is an importer, the banker ordinarily accepts the drafts upon the delivery to him of the documents covering the shipment, which documents he then turns over to his customer against a trust receipt. When a credit of this kind is opened, the usual practice is for the banker to require the signature of a form containing an agreement to hold him harmless for accepting the bills, to place him in funds sufficient to pay off the bills three days prior to their maturity, and to pay him a commission on the transaction, this commission varying according to the length of time the bills are to run and the financial standing of the customer. The cost of the accommodation to the customer is this commission plus the prevailing rate of discount for bankers' bills.

In the United States the national bank act does not permit banks to accept time bills drawn on them. Although the act does not specifically prohibit such acceptances, the courts have decided that national banks have no power to make them. This restriction has had a very considerable influence upon the development of banking in this country. For some time after the passage of the national bank act, merchants and manufacturers provided themselves with funds by discounting their

promissory notes with their local banker. Gradually, however, many concerns, finding that their needs were outstripping the banking accommodation which they could secure in their immediate vicinity, came to place their notes in the hands of brokers who in turn disposed of them to such bankers as possessed greater surpluses than they could satisfactorily invest at home. It is this method of borrowing which is now largely employed. In other words, the prohibition of bank acceptances has led to the creation of a vast amount of promissory notes instead of time bills of exchange. The difference between these two classes of instruments accounts to a great extent for the difference between European and American banking. In the case of time bills of exchange drawn on and accepted by prime banks and bankers there is practical uniformity of security. In the case of our promissory notes or commercial paper there is no such uniformity, the strength of the paper depending on the standing of miscellaneous mercantile and industrial

concerns.

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It is this uniformity of security, on the one hand, which makes possible a public discount market; it is the lack of it in single-name paper which makes such a market impossible. As a result, we have great discount markets in London, Paris, and Berlin, and none in New York. European centers the discount rate is the rate upon which the eyes of the financial community are fixed. In New 1 York it is the rate for day-to-day loans on the Stock Exchange. The advantage in character of the one rate over the other clearly indicates an important advantage of European banking systems over our own. In the first

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place, the European discount rate bears a very direct relation to trade conditions. Its fluctuations depend primarily on the demand for and supply of bills which owe their origin to trade transactions, as balanced against the demand for and supply of money. If trade is active the supply of bills becomes large, rapidly absorbing the loanable funds of the banks. As these surplus funds become less and less banks are unwilling to discount except at advanced rates. If trade is slack, less accommodation from bankers in the way of acceptances is required, bills become fewer in number, the competition for them in the discount market more keen, and the rate of discount declines. Low rates are an incentive to business and advancing rates act as a natural check. The New York call-loan rate, on the other hand, bears only an indirect relation to trade conditions. Its day-to-day fluctuations register mainly the speculative and investment demand for stocks. Low rates, instead of being an incentive to the revival of trade, are rather made the basis for speculative operations in securities.

The striking difference, however, between European you are mak discount rates and the New York call-loan rates is that the on impoti former are comparatively stable and the latter subject to most violent oscillations. Foreign discount rates as bank reserves become depleted advance by fractions of 1 per cent. In New York the money rate advances on occasion 10 per cent at a time, mounting by leaps and bounds from 20 per cent to 100 per cent in times of stress.

There are two principal reasons for the stability of foreign discount rates. In the first place, trade expands and contracts gradually, so trade bills multiply or diminish in

number little by little, producing a gradual increase or decrease in the demand for money. In the second place, discount rates are steady because there is a free movement of funds between the countries possessing great discount markets. Between London and Paris money flows as the balance of indebtedness changes, modified by the discount rates at the respective centers. If France owes England more than England owes France, money will tend to flow from Paris to London in settlement of this balance of indebtedness. If the London discount rate is higher than that of Paris, the movement will be accentuated by the movement of French funds to London for investment in sterling bills of exchange—that is, in bills drawn on and accepted by prime English banks and bankers. If the Paris discount rate is higher than that of London, there will be a natural offset to the tendency of funds to move to London in settlement of this balance of indebtedness. Briefly, money seeks investment in those centers where the discount rates are highest. If the discount rate in Paris is 12 per cent and 234 per cent in London, Paris bankers remit funds to London for investment in sterling bills. This increases the supply of money competing for bills in London and forces the discount rate downward. At the same time the drain of funds from Paris results in lessening the competition for bills in that center and the Paris discount rate rises. Thus it is that funds freely move to and fro between London, Paris, Berlin and Amsterdam, an exact equality in rates being prevented largely by the fact that the discount markets in these cities differ in size and that there is not in each an equally free market for gold. For example, the Paris discount