10. Registration of assigned accounts.—One phase of this practice has repeatedly come up for discussion and has received rather severe criticism. That is the element of secrecy in the selling and pledging of ac counts. It is pointed out that such a system lends itself readily to the practice of fraud, not only upon creditors but upon the finance companies that ad vance money on such pledges. Cases have occurred in which it was found, after the failure of the debtor, that all accounts receivable had been hypothecated. It is reported that in some cases instalment leases have been duplicated by fraudulent dealers and that bogus shipments have been recorded for the purpose of defrauding the financial house to which the ac counts were sold.
This raises the question whether, in order to pre vent fraud, all sales and pledges of accounts should not be made matters of public record, just as in the case of chattel mortgages. The fairness and justice of this suggestion can hardly be questioned, and it is likely that legislation insuring such protection to legitimate creditors will be enacted.
11. Trade acceptance.—There is, however, a grow ing feeling on the part of many wholesalers and manu facturers that the present open-account system should give way to one in which the use of negotiable paper would be a more prominent feature. In support of this opinion, it is argued that if the merchant were required to accept a draft, or tender his note for the amount of his purchases, he would be less likely to fall into the common error of overbuying. He would also feel less free to annoy the wholesaler or the manu facturer with a return of goods to be credited to his account. Moreover—and,this is, no doubt, the chief argument from the creditor's point of view—his bill, instead of being payable to the seller, would in that case be payable to the bank, thereby relieving the seller of the burden of carrying the account. The satisfactory operation of this plan in the chief coun tries of Europe, as well as in Canada, augurs well for its success if it is generally adopted in the United States, even tho in this country conditions are neces sarily different in several respects.
Before the Civil War a large part of the whole sale business in the United States was financed by drafts drawn upon the purchaser by the seller. These drafts were payable in from thirty to one hundred and twenty days--sometimes even a longer period— according to the requirements of the case. They were presented to the debtor, or drawee, who "ac cepted" them if they were in order, and thereupon re turned them to the original drawer. Such paper was termed an acceptance and usually had a high stand ing in the market. In the creditor's, or drawer's, hand this paper was essentially a promissory note with the drawee's credit as well as the drawer's be hind it, which the latter could hold until maturity or sell if he desired. The double indorsement rendered the paper desirable at the bank as collateral.
But at the end of the war the credit system was demoralized and every merchant tried to sell his goods for cash. It was out of this situation that the custom
of giving "cash discounts" arose. As an inducement to make cash payment, discounts were offered on all invoices. These cash discounts were made so attrac tive that it was to the buyer's interest even to bor row the cash, if necessary, in order to take advantage of the discount. In fact, the cash discount offered was generally so large that failure to take it reflected distinct discredit upon the buyer, since it was taken to indicate either very poor business judgment on his part or actual inability to borrow money at home.
This custom found general favor with the busi ness world just after the Civil War and has been handed down to us. It possesses the advantage of relieving the seller from the burden of carrying an account. But, on the other hand, it has some dis tinct disadvantages. It has, for example, practically done away with the draft, and even with the promis sory note, in ordinary commercial transactions. In fact, for the seller to draw a draft or to demand a note is now often considered little less than an insult to the buyer.- Few buyers pay when the goods are shipped; hence, in such a case, the seller has no acknowledg ment of the debt on which he can readily borrow. Therefore if he wants a loan he is forced to employ his own credit exclusively. True, as already pointed out, he can assign his account, but this he is not al ways willing to do, lest it be considered a sign of fi nancial weakness. Hence the seller is compelled to carry the debt upon his books as an account receiv able, until it is paid.
12. Three advantages of trade acceptance.—The trade acceptance has at least three advantages. (1) It gives the seller a prompt acknowledgment of the debt. Under our system of carrying a customer's account on the books, if a firm, in order to collect a debt, has to sue upon an open account, it must go into court and swear to the justness of the claim, and must be prepared to support its contention with evidence. (2) Such trade acceptance extends the small deal er's credit field and has, moreover, a tendency to equalize credit thruout the country. Under pres ent conditions the buyer is almost compelled to take the cash discount if he is to hold his own with com petitors, and to do so he usually has to borrow in his local market. But money may be tight in his own section, altho relatively easy in other parts of the country. Rarely, however, is be able to borrow away from home. Some of the larger merchants, in order to use their credit wherever the money rate is easiest, carry bank accounts in various centers. Some even go so far as to borrow in the easy market and lend where money is tighter. To the smaller mer chant, however, this course is not usually open. (3) The trade acceptance is a readily salable asset. No safer investment for short-time funds can be found than these acceptances of commercial bills. Our business men and bankers have long felt the need for just such a liquid asset.