Bankers’ Acceptances & the Early Federal Reserve

I came across an interesting article outlining the rise of Bankers’ Acceptances and their centrality to the early Fed. These instruments are now largely forgotten.

Bankers’ Acceptances (BA) were, I think, authorized by the Federal Reserve Act (1913) and were meant to be like the Trade Bills then used in Britain. What are BAs? They were a form of a Bill of Credit (which I talked about in a previous post). To oversimplify, a BA was a post-dated certified check used in trade, especially international trade. A buyer makes a payment to a seller by issuing a post-dated draft. (Postdating allows time for the buyer to receive the goods and perhaps sell them before payment is made.) A bank then “accepts” the draft by stamping it (see image), ensuring that it will make the final payment.

Bankers’ Acceptances were popular in the early twentieth century US because they were seen as not speculative, being based on “real trade” not stock purchases, they facilitated international trade, and boosted agricultural sales at home and abroad. In the process, BAs helped push the Dollar into international dominance during the 1920s at the expense of the Pound.

The Fed supported these goals and worked to develop a secondary market for BAs as they could be traded at a discount before maturity. Bankers’ Acceptances became the backbone of early Fed operations. As lender of last resort, the Fed had (and still has) its “Discount Window” where BAs (and now other securities) could be sold to the Fed at a fixed discount rate. Until the Great Depression, Bankers’ Acceptances made up most of the Fed’s balance sheet and were used in open market operations.