Transforming the Culture of Commercial Credit: Trade Acceptances, Financial Reform, and the U.S. Money Market, 1915-1923

Existing research describes the shift from insider to impersonal lending in late-19th century New England and the negative effect of restricting bank lending to short-term commercial transactions on fixed capital investment (Lamoreaux 1991). But how do shifts to impersonal lending affect circulating capital? This paper explores this theme by examining a similar—albeit less successful—financial reform agenda initiated following the creation of the Federal Reserve in 1913. Specifically, it documents the promotion of—and resistance to—a brazen plan to transform the entrenched commercial credit practices of U.S. distributors and retailers by replacing open account credits and the cash discount system with trade acceptances (i.e. commercial bills of exchange). Drawing on a rich body of primary sources from the Fed, trade associations and the commercial press, the paper endeavours to show why these efforts were largely fruitless. Financial reformers relied on trade associations to promote their agenda despite uncertainty about the legality of this strategy under anti-trust law. Reformers argued that the adoption of trade acceptances would lead to a “modernization” of business practices and make mercantile credit “productive” insofar as acceptances purportedly offered a safe way of increasing the available means of payment as demand surged during World War I. Furthermore, boosting the supply of acceptances would support the establishment of a deep and liquid acceptance-based money market capable of supplanting New York’s call loan market. Meanwhile, opponents developed narratives championing the merits of the “American way” of commercial credit. In the end, however, the main factors in the failure of this radical transformation of commercial credit arrangements in the distribution industry were the indifference of large enterprises and the defensive stance of country bankers eager to maintain market share and profitability. Overall, the paper offers an original perspective on the relationship between business practices and macro-level structures.