Commercial paper history

A short-term debt instrument, maturing between 30 days and 270 days from original issue date. A liquid secondary market for it, along with other money market instruments, exists among banks and investment banks, which maintain prices in the secondary market. Commercial paper is issued by corporations with investment-grade credit ratings and represents the cheapest cost of funds attainable for companies in the short-term.

Commercial paper dates to the 19th century, when New York merchants began selling their short-term notes payable to intermediate dealers, who would buy them at a discount and resell them to another investor, usually a bank. When the note matured, the borrower paid back face value to the investor. The first money market dealer to buy these notes was Marcus Goldman, whose GOLDMAN SACHS & CO. became one of the largest dealers in the country after the Civil War. Until the Second World War, commercial paper was used by the FEDERAL RESERVE in its open market operations, along with Treasury bills, to sell or buy from recognized dealers in order to affect the amount of bank reserves in circulation.

During the 1950s and 1960s, the number of companies issuing commercial paper increased steadily, and it became the most popular instrument in the money market. Parallel with its development was the development of consumer credit, mainly through the use of CREDIT CARDS. Many of the finance companies offering credit card facilities to customers borrowed the money necessary to finance card operations through commercial paper and then purchased credit card receivables from merchants. The amount charged to customers was often substantially higher than the cost of borrowing.

Commercial paper can be sold directly into the market by issuing companies (directly placed), or it may be sold through an intermediary dealer (dealer placed). In the 1980s, a debate developed over whether banks that acted as dealers were in violation of the BANKING ACT OF 1933 by underwriting this short-term corporate paper in the market even though commercial paper was defined by the Securities and Exchange Commission as short-term corporate debt of less than 270 days to maturity and thus not a bond.

Today, the commercial paper market is the largest single source of short-term financing for corporations along with loans provided by commercial banks. It is the major source of shortterm financing for most large corporations with credit ratings high enough to access the market on a regular basis. It is also the main source of funds for credit card lending and many other forms of short-term loans, both for consumers and companies alike.