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Full text of "Commercial banking practice under the Federal reserve act;"

HG 1616 
.N3 
1921 
Copy 1 




Commercial 
Banking Practice 

under the 

Federal Reserve Act 




National Bank of Commerce 

inNewYork 




Revised to October, 1921 



Commercial 
Banking Practice 

under the 

Federal Reserve Act 



The Law and the Regulations, 
Rulings and Opinions of Counsel 
of the Federal Reserve Board 
Governing Bank Acceptances, 
Rediscounts, Advances and 
Open Market Transactions of 
the Federal Reserve Banks 




Third Edition 
Revised to October, 1921 

National Bank of Commerce 

in Newark 



H^ 



it* b 



Copyright 1921 

National Bank of Commerce 
in New York 



DEC 27 '2 

aC!.A530994 



~v\ T> 



> 



Foreword 

TN Commercial Banking Prac- 
tice it has been the purpose 
of the National Bank of Com- 
merce in New York to present 
a reference manual in convenient 
form for the use of business men 
and bankers. This edition is the 
third to be issued since 1917, and 
has been revised to include new 
and modified rulings of the 
Federal Reserve Board. 

James S. Alexander 

President 



CONTENTS 

Part I. Bank Acceptances Page 

Acceptances 7 

General Statutory Provisions 9 

Bank Acceptances Based on Imports and Exports 11 

Bank Acceptances Based on Domestic Shipments of Goods.. 32 

Bank Acceptances Secured by Warehouse Receipts 43 

Bank Acceptances Executed to Furnish Dollar Exchange. ... 53 
Letters of Credit and Acceptances Issued for Correspondents . . 59 
Investment in Bank Acceptances by National Banks 64 

Part II. Rediscounts with Federal Reserve Banks 

General Statutory Provisions 69 

General Regulations of Federal Reserve Board 73 

Rediscount of Promissory Notes 77 

Rediscount of Drafts and Trade Acceptances 107 

Rediscount of Six Months' Agricultural Paper 125 

Rediscount of Bank Acceptances 134 

Part III. Advances by Federal Reserve Banks 

General Statutory Provisions 149 

General Regulations of Federal Reserve Board 149 

Security 150 

Maturity 151 

Part IV. Open Market Transactions 

General Statutory Provisions 153 

General Regulations and Rulings 153 

Eligible Bills and Acceptances 157 

Ineligible Bills and Acceptances 158 

Requirement of Statements 159 

Maturity 160 

Indorsement 161 

Appendix: Acceptance Powers of International Financial 

Corporations 165 

Index 170 



AUTHORITIES 



This book has been compiled from the following 
official sources: 

Federal Reserve Act 

National Bank Act 

War Finance Corporation Act 

Regulations of the Federal Reserve Board 

Federal Reserve Bulletin 



First Edition, July, 1917 

Second Edition, October, 1918 

Third Edition, October, 1921 



PART I. 



Bank Acceptances 



The term "acceptance" designates a draft or bill j^'J 1 " 106 " 
of exchange drawn to order, payable at a definite 
time after date or sight, the obligation to pay which 
has been accepted by an acknowledgment thereon 
written or stamped and signed (generally across 
the face of the instrument) by the party on whom 
the bill is drawn. This acknowledgment, which gen- 
erally consists merely of the word "accepted" fol- 
lowed by signature and date, constitutes the agree- 
ment of the acceptor to pay the draft at maturity 
according to its tenor, without qualifying condi- 
tions. To be negotiable, such an accepted bill must 
be for a definite amount and must be payable in 
money. 

An ordinary "trade acceptance" is created when, 
for example, the seller of merchandise draws a draft 
for the purchase price on the purchaser and the pur- 
chaser accepts the draft. The purchaser, however, 
may enter into an agreement with his bank whereby Bank acceptance 
the bill is drawn on the bank and is accepted by it 
for his account instead of by the purchaser himself. 
Such a draft, when accepted, becomes a "bank ac- 
ceptance." The Federal Reserve Board has defined 
a bank acceptance as "a draft or bill of exchange 
... of which the acceptor is a bank or trust com- 
pany, or a firm, person, company, or corporation Definilion 
engaged generally in the business of granting bank- 
ers' acceptance credits." 



Commercial Banking Practice 



Use of 

bank 

acceptances 



Coverture of 
acceptances 



Acceptance of 
eligible bills 



Bank acceptances are used largely in financing 
international trade and domestic transactions in- 
volving major staple commodities. They hold a 
preeminent place among credit instruments and 
offer a means of investment in which the credit risk 
has practically been eliminated. This is due to the 
fact that direct responsibility for their payment 
rests on banking institutions whose credit is gen- 
erally and widely known. 

At a meeting of the leading banks and bankers 
of New York, Boston, Philadelphia, and other 
cities, held at the National Bank of Commerce in 
New York, August 14, 1918, it was resolved that: 

"The accepting bank shall require from its clients 
that it be placed in funds to meet acceptances on 
day of maturity either by 

"(a) The deposit of clearing house funds one 
day prior to maturity, or 

"(b) The deposit of cash or check on the Federal 
Reserve Bank of New York on the day of 
maturity, or 

"(c) Debit to the account of the bank's client on 
day of maturity against funds cleared on, 
or prior to, such date." 

Since accepting banks do not ordinarily accept 
bills other than those which are eligible for redis- 
count or purchase at Federal reserve banks, those 
subdivisions of Parts II and IV which relate to the 
rediscount and purchase of bank acceptances (pages 
134-148 and 153-163, below) should be read in con- 
nection with Part I. 



General Statutory Provisions 

Any member bank may accept drafts or bills of J f c ^£ ce 
exchange drawn upon it having not more than six 
months' sight to run, exclusive of days of grace, 
which grow out of transactions involving the im- ^jfj™ 18 *^ ' 1 " 
portation or exportation of goods; or which grow Against domestic 
out of transactions involving the domestic shipment s pmen s 
of goods provided shipping documents conveying or 
securing title are attached at the time of acceptance ; 
or which are secured at the time of acceptance by Against warehoused 
a warehouse receipt or other such document con- sla P ,es 
veying or securing title covering readily marketable 
staples. No member bank shall accept, whether in Luniton 
a foreign or domestic transaction, for any one per- ^ r c ^" ces 
son, company, firm, or corporation to an amount interest 
equal at any time in the aggregate to more than ten 
per centum of its paid-up and unimpaired capital 
stock and surplus, unless the bank is secured either 
by attached documents or by some other actual 
security growing out of the same transaction as the 
acceptance; and no bank shall accept such bills to Limit on aggregate 
an amount equal at any time in the aggregate to acce P tances 
more than one-half of its paid-up and unimpaired 
capital stock and surplus : Provided, however, That Extension of 
the Federal Reserve Board, under such general lumt 
regulations as it may prescribe, which shall apply 
to all banks alike regardless of the amount of cap- 
ital stock and surplus, may authorize any member 
bank to accept such bills to an amount not exceed- 
ing at any time in the aggregate one hundred per 
centum of its paid-up and unimpaired capital stock 
and surplus : Provided, further, That the aggregate Limit on a re ate 
of acceptances growing out of domestic transac- domestic acceptances 



10 



Commercial Banking Practice 



Acceptances for dollar 
exchange 



Acceptances for one 
bank limited 



Limit on 

aggregate of such 
acceptances 



tions shall in no event exceed fifty per centum of 
such capital stock and surplus. 



Any member bank may accept drafts or bills of 
exchange drawn upon it having not more than three 
months' sight to run, exclusive of days of grace, 
drawn under regulations to be prescribed by the 
Federal Reserve Board by banks or bankers in for- 
eign countries or dependencies or insular posses- 
sions of the United States for the purpose of fur- 
nishing dollar exchange as required by the usages 
of trade in the respective countries, dependencies, 
or insular possessions. . . . Provided, however. 
That no member bank shall accept such drafts or 
bills of exchange referred to in this paragraph for 
any one bank to an amount exceeding in the aggre- 
gate ten per centum of the paid-up and unimpaired 
capital and surplus of the accepting bank unless the 
draft or bill of exchange is accompanied by docu- 
ments conveying or securing title or by some other 
adequate security: Provided, further, That no 
member bank shall accept such drafts or bills in an 
amount exceeding at any time the aggregate of one- 
half of its paid-up and unimpaired capital and sur- 
plus. 

(Federal Beserve Act, Section 18«) 



Bank Acceptances Based on Imports 
and Exports 

CHARACTER 
Statutory Provisions 

Any member bank may accept drafts or bills of Acceptances 

in lorGiffn 

exchange drawn upon it . . . which grow out of trade 
transactions involving the importation or exporta- 
tion of goods. 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

Determination of Character of Transactions on Which Accept- 
ances Are Based. 

Held not to be necessary that the specific goods identification 
covered by an acceptance based upon an import or goSsnot 
export transaction must be identified at the time of re< i u,red 
the acceptance. 

(Ruling, Federal Reserve Bulletin, December, 1915, page 
405. See also Regulation A, Series of 1920, B, pages 
135-137, below.) 

Good faith must be relied upon to a large extent Good faith 
in determining whether an acceptance is based upon 
a transaction involving the importation or exporta- 
tion of goods. A member bank would be justified 
in putting on the legend "this acceptance is based 
on a transaction involving the importation or ex- 
portation of goods," provided it is satisfied the state- 
ment by its customer is made in good faith. 

(Ruling, Federal Reserve Bulletin, December, 1915, page 
406.) 

The Federal reserve bank reserves the right to ask Substantiation 
State member banks for evidence underlying the assurances** 
certification given to it, and the bank examiner may 



Bank Acceptances 13 

require evidence from the national bank. Member 
banks would, therefore, best protect themselves by 
stipulating for themselves the right at times to ask 
for substantiation of the assurances given by their 
customers. 

(Ruling, Federal Reserve Bulletin, December, 1915, page 
406.) 

Transaction Must Itself Involve Import or Export of Goods. 

A transaction, in order to be the basis of a draft Transactions 
or bill eligible for acceptance by a member bank, JfiSJwfor 
must itself involve the importation or exportation export not 

sti rficicn t 

of goods. A transaction wholly independent of the basis 
transaction covering the importation or exportation 
of goods is not sufficient basis for an acceptance, 
under the terms of section 13 (relating to accept- 
ances against imports or exports ) . 

(Opinion of Counsel, Federal Reserve Bulletin, September, 
1915, page 276.) 

Where the contract between a seller of goods who Drafts , 

treated as 



draws a draft and the purchaser is entirely inde- drawn in 

domestic 
transactions 



pendent of the contract for the export of the goods, d< 



the draft would have to be treated as drawn in a 
domestic transaction and would have to be accom- 
panied by shipping documents or secured by ware- 
house receipts or other similar documents conveying 
and securing title when accepted by the drawee 
bank. 

(Ruling, Federal Reserve Bulletin, May, 1918, page 435.) 

A draft drawn by an importer of goods for the importers* 
purpose of procuring funds with which to pay the ™ney Se 
foreign seller of those goods is eligible for accept- 
ance by a member bank whether or not the bill of 
lading covering the goods is attached to the draft 
and whether or not the goods have actually been 



drafts 



14 Commercial Banking Practice 

shipped by the seller at the time the draft is drawn. 
In such a case, that is, where there has been an 
actual sale of goods for export, the draft which is to 
procure funds with which to pay for those goods is 
one which clearly grows out of a transaction involv- 
ing the importation of goods within the meaning 
of section 13, and as such is eligible for acceptance 
by a member bank, provided, of course, that it com- 
plies in other respects with the terms of the law and 
the regulations of the Federal Reserve Board. 

This ruling is not intended in any way to apply 
to the case of a draft drawn by an American manu- 
facturer for the purpose of financing the purchase 
of goods not from a foreign seller but from an 
American importer. 

(Ruling, Federal Reserve Bulletin, February, 1920, page 
162.) 

intention Drafts drawn under an agreement whereby the 

noSicient drawer agrees to manufacture and import into the 

baS18 United States in time to meet the maturity of such 

drafts certain products which shall have been sold 
by the shipper and are to be ready for immediate 
delivery and consigned to a firm of bankers pro- 
curing the acceptance of such drafts for the drawer 
are not eligible for acceptance by member banks; 
since they do not grow out of "transactions involv- 
ing the importation or exportation of goods" within 
the meaning of section 13 of the Federal Reserve 
Act. In the absence of shipping documents and 
warehouse receipts securing such drafts they could 
not be accepted as drawn in a domestic transaction. 

(Opinion of Counsel, Federal Reserve Bulletin, October, 
1918, page 976. See also Regulation A, Series of 1920, B, 
pages 185-187, below.) 



Sank Acciptancis 15 

If a drawee bank accepts at the instance of the Acceptance 
purchaser of goods, the purchaser having a contract of Shorter 
to export such goods, the drafts would grow out of 
a transaction involving the export of goods and 
could be accepted by the drawee bank under author- 
ity of section 13. 

(Ruling, Federal Reserve Bulletin, May, 1918, page 435.) 

Where a domestic corporation "A" enters into intention 
a contract with another domestic corporation "B" ultimately 
to furnish material to be used by "B" in the manu- lf s ^ chnt 
facture of products which "B" is under contract to 
export, the mere fact that the material furnished is 
ultimately intended for export in some form cannot 
be said to merge the two transactions into one. The 
transaction between "A" and "B" could not be said 
to involve the exportation of goods. 

(Opinion of Counsel, Federal Reserve Bulletin, September, 
1915, page 276.) 

The mere fact that the drawer is manufacturing Contract to 
goods which he intends ultimately to export does expor 
not alone bring it within the scope of a transaction 
involving the exportation of goods. The person for 
whom the draft is accepted must have a definite 
bona fide contract for the shipment of the goods 
within a specified and reasonable time. 

(Opinion of Counsel, Federal Reserve Bulletin, January, 
1920, page 66.) 

National banks cannot accept drafts for the pur- Acceptance* 
pose of enabling domestic concerns to extend credits JpelTaccounts 
on open account to foreign purchasers. 

(Ruling, Federal Reserve Bulletin, March, 1919, page 253.) 

An acceptance house which has purchased an ac- Drafts drawn 
ceptance based on the importation or exportation cEeral of 
of goods desires to reimburse itself by drawing a acce P tan <:es 
bill upon a national bank, pledging as collateral 



16 



Commercial Banking Practice 



Ineligible 
for acceptance 



Acceptance 
secured by 
documentary 
drafts 



Goods purchased 
subsequent to 
acceptance 



security for the bill the original acceptance. It is 
held that the new bill cannot properly be said to 
grow out of the original export transaction in the 
sense contemplated by the Federal Reserve Act. 

A national bank is not authorized to accept a 
draft drawn under the above circumstances because 
it is not an acceptance growing out of a transaction 
involving the importation or exportation of goods, 
nor drawn by a bank or banker located in a foreign 
country, nor does it grow out of a transaction in- 
volving the domestic shipment or storage of goods. 

(Ruling, Federal Reserve Bulletin, January, 1917, page 29.) 

A draft drawn upon a national bank which is 
secured by a documentary draft drawn by the same 
drawer upon a foreign buyer is eligible for accept- 
ance by the national bank. However, no bank 
which has purchased a foreign documentary draft 
may refinance itself by drawing a draft on a mem- 
ber bank secured by the documentary draft. If, 
however, the seller or shipper of goods draws a 
draft upon the foreign buyer or consignee payable 
abroad and secured by shipping documents, it is 
proper for the drawer to finance that shipment by 
a banker's acceptance secured by that documentary 
draft. 

(Ruling, Federal Reserve Bulletin, June, 1920, page 610.) 

Acceptance of Drafts Prior to Purchase or Sale of Goods Im- 
ported or Exported. 

In interpreting the word "involved" in connec- 
tion with the importation or exportation of goods, 
upon which an acceptance has been based, it is held 
that goods may be purchased and shipped subse- 
quent to the time of the first acceptance, provided 
that there is a definite bona fide contract for the 



Bank Acceptances 17 

shipment of the goods within a specified and reason- 
able time. 

(Ruling, Federal Reserve Bulletin, December, 1915, page 
405.) 

Section 13 of the Federal Reserve Act is con- Delay in 
strued to justify a national bank in accepting a fJnTterial 
draft drawn upon it in settlement of advances for 
cotton being accumulated by cotton buyers for 
export. The fact that there is a temporary delay in 
actual shipment of goods is immaterial. 

(Ruling, Federal Reserve Bulletin, September, 1916, page 
458.) 

A national bank may properly accept a draft, Acceptances 
drawn for the purpose of importing goods whether Spoliations* 
or not the sale of the goods under consideration has of goods 
actually been consummated at the time of the ac- 
ceptance of the draft, if the accepting bank is as- 
sured that the proceeds of the draft will ultimately 
be used solely for the purpose of financing a trans- 
action involving the importation of goods. It is not 
necessary that the goods to be sold be identified at 
the time of acceptance. The accepting bank, how- 
ever, must be reasonably sure that the draft is 
drawn for the purpose of financing a transaction in- 
volving the importation or exportation of goods, 
and that its proceeds will be used for that purpose. 

(Ruling, Federal Reserve Bulletin, July, 1917, page 527.) 

A member bank would be justified, if fully se- Export contract 
cured, in accepting drafts drawn bjr a local cotton- no 
buying firm having a contract to sell to foreign buy- 
ers if the transaction, after having been made in 
good faith, ultimately resulted in the sale of the 
cotton to an American instead of a foreign pur- 
chaser. It was assumed in connection with this in- 
terpretation of section 18 that the bank had received 



18 Commercial Banking Practice 

permission from the Board to accept drafts or bills 
of exchange drawn upon it ; that the cotton buyers 
had a contract to sell cotton to a firm of Liverpool; 
that they held the cotton subject to shipping re- 
ceipt of the Liverpool firm; and that because of 
freight rates and shipping conditions the Liverpool 
firm changed its policy and directed the sale of the 
cotton. 

(Ruling, Federal Reserve Bulletin, January, 1916, page 
13.) 

Acceptance Agreements of Dealers in Same Goods for Export 
and Domestic Sale. 

If dealers purchasing or producing the same class 

of goods both for export and domestic sale wish to 

finance their export transactions by means of eligi- 

essenty " 8 °l e bankers' acceptances, the Board suggests that 

to eligibility j^g contracts between such dealers and their accept - 

at reserve . . . . * 

banks mg banks contain the following provisions, (a) that 

the dealer has entered into contracts providing for 
the exportation of goods of a specified amount 
within a specified and reasonable time; (b) that the 
total amount of drafts drawn by the dealer under 
credits opened to finance the exportation of such 
goods shall at no time exceed the aggregate amount 
of the export transactions contracted for and in 
process of execution; (c) that the proceeds of drafts 
drawn against the accepting bank under this credit 
will be used to consummate the export contracts 
referred to, that the dealer will furnish in due 
course to the accepting bank shipping documents 
covering such goods, and that the proceeds of the 
sale of the goods exported will be applied in liqui- 
dation of the acceptance credit. 

(Ruling, Federal Reserve Bulletin, January, 1921, page 
70.) 



Bank Acceptance! 19 

Acceptances Against Coin and Bullion. 

Gold coin is "goods" within the meaning of sec- Gold cob 
tion 13 of the Federal Reserve Act. 

(Ruling, Federal Reserve Bulletin, January, 1917, page 
29.) 

Gold bars may be properly considered as goods. Bullion 

(Ruling, Federal Reserve Bulletin, January, 1917, page 
29.) 

MATURITY 

Statutory Provisions 

Any member bank may accept drafts or bills of Maturity 
exchange drawn upon it having not more than six 
months' sight to run, exclusive of days of grace. 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

A national bank is held to be authorized to enter Duration of 
into an agreement having more than six months to S3§ " 
run, by the terms of which it obligates itself for a 
period of time specified in the agreement to accept 
drafts drawn upon it, provided such drafts grow 
out of transactions involving the importation or 
exportation of goods, and that the individual drafts 
have not more than six months' sight to run. This 
distinction is emphasized: "While a letter of credit 
or credit agreement may lawfully be made by a 
national bank which will extend by its terms for a 
period exceeding six months, the agreement must 
not be of such a character as will impose upon the 
holders of drafts accepted thereunder any obliga- 
tion to renew such drafts so that the period of ac- 
ceptance shall exceed six months in duration as to 
any specified draft." 

(Ruling, Federal Reserve Bulletin, September, 1915, page 
269.) 

There is no objection to a national bank's agree- 



20 



Commercial Banking Practice 



Determination 
of maturity 



Statement 
of case 



Basis of 
acceptances 



ing in advance to accept drafts aggregating certain 
amounts for a period of more than six months, but 
each individual draft drawn under a credit of that 
character must comply with the provisions of the 
law relating to the acceptance of the original draft. 
(Opinion of Counsel, Federal Reserve Bulletin, January, 
1920, page 67.) 

Where a six months' credit is required it is im- 
proper to grant that credit by means of two three 
months' acceptances for the purpose of making the 
acceptances at all times eligible for rediscount by 
Federal reserve banks. On the other hand, the 
period covered by an acceptance should not be in 
excess of that which is usual and reasonably neces- 
sary to finance the underlying transaction. 

(Ruling, Federal Reserve Bulletin, March, 1921, page 308.) 

A national bank makes acceptances covering the 
importation of automobile parts from France, with 
a maturity of ninety days, which is supposed to be 
sufficient to cover payment for the merchandise in 
France, its transit to New York, its warehousing, 
and subsequent sale from warehouse. It is found, 
however, that before the transaction has been com- 
pleted by the sale of the merchandise, the ninety-day 
period has expired, although the parts had already 
arrived and were stored pending resale. The ques- 
tion is on the propriety of making renewal accept- 
ances to finance the storage and resale. 

Automobile parts can not be regarded as readily 
marketable staples within the meaning of section 
13. Consequently, if the drafts are to be secured 
by warehouse receipts covering the automobile 
parts, that fact would not of itself make the drafts 
eligible for acceptance by national banks. The 
drafts are eligible for acceptance only if and upon 



Bank Acceptances 21 

the ground that they can be said to grow out of 
the importation of the automobile parts within the 
intent of section 13. 

The Board is of the opinion that where the goods Renewals in 
have come into the possession of the importer in transactions 
the United States, who is the taker of the credit, 
the transaction involving the importation of those 
goods must be considered so far concluded as to 
preclude the issuance of a renewal draft based upon 
that transaction. The Board is of the opinion, 
therefore, that upon the facts stated the renewal 
drafts would be ineligible for acceptance by 
national banks. 

(Ruling, Federal Reserve Bulletin, June, 1921, page 699.) 

The acceptance of a private banking house made Renewals 
for a bag compam^, stating in the body of the draft 5JJJJJ, 
that it is for burlap from Calcutta stored on the ondocks 
docks, might be continued or renewed while the 
goods are on the docks. 

(Ruling, Federal Reserve Bulletin, January, 1917, page 
30.) 

AMOUNT BANK MAY ACCEPT FOR ONE INTEREST 
Statutory Provisions 

No member bank shall accept, whether in a for- Ten per 
eign or domestic transaction, for any one person, jjjjj 
company, firm, or corporation to an amount equal 
at any time in the aggregate to more than ten per 
centum of its paid-up and unimpaired capital stock 
and surplus, unless the bank is secured either by 
attached documents or by some other actual security 
growing out of the same transaction as the accept- Exception 
ance. 

(Federal Reserve Act, Section 13.) 



22 



Commercial Banking Practice 



Secured bills 



Trust 

receipts 



Regulations of Federal Reserve Board 

The fifth paragraph of section 13 of the Federal 
Heserve Act as amended . . . limits the amount 
which any bank shall accept for any one person, 
company, firm, or corporation, whether in a foreign 
or domestic transaction, to an amount not exceed- 
ing at any time, in the aggregate, more than ten 
per centum of its paid-up and unimpaired capital 
stock and surplus. This limit, however, does not 
apply in any case where the accepting bank remains 
secured either by attached documents or by some 
other actual security growing out of the same trans- 
action as the acceptance. A trust receipt which 
permits the customer to have access to or control 
over the goods will not be considered by Federal 
reserve banks to be "actual security" within the 
meaning of section 13. A bill of lading draft, how- 
ever, is "actual security" even after the documents 
have been released, provided that the draft is ac- 
cepted by the drawee upon or before the surrender 
of the documents. 

(Regulation C, Series of 1920, A, I.) 



Acceptances 
of foreign 
correspondent 
under 

guarantee of 
national bank 



Opinions and Rulings 

Drafts accepted by foreign correspondents at 
the request and under the guarantee of a national 
bank in the United States should be reported as a 
direct liability of such national bank, and treated 
as subject to the limitations imposed by the Federal 
Reserve Act on the acceptance power of national 
banks. 

(Opinion of Counsel, Federal Reserve Bulletin, April, 
1918, page 311. See also "Letters of Credit and Acceptances 
Issued for Correspondents," pages 59-63, below.) 



Bank Acceptances 23 



actual 
security 



The acceptance by a bank of unsecured drafts J""*"** 
(under the guarantee of one of its customers) to constitute 
an amount exceeding ten per cent, of the capital 
and surplus of the bank would constitute a viola- 
tion of the limitation contained in section 13 of the 
Federal Reserve Act, whether or not the customer 
of the bank guaranteeing the acceptance is the 
drawer of the draft, or some other person. 

(Ruling, Federal Reserve Bulletin, February, 1919, page 
143.) 



bills 



Exemption from Ten Per Cent. Limit. 

The ten per cent, limit upon the amount of ac- Secured 
ceptances which any member bank might make for 
any one person, company, firm, or corporation does 
not apply if "the bank is secured either by attached 
documents or by some other actual security grow- 
ing out of the same transaction as the acceptance." 

If documents which were attached at the time Accepting 
of the acceptance are surrendered and no other bank . must 

. . remain 

security growing out of the same transaction is sub- secured 
stituted, the ten per cent, limit will apply. The 
accepting bank must remain secured in the manner 
prescribed during the life of the acceptance in order 
to be exempt from the ten per cent, limit. 

(Ruling, Federal Reserve Bulletin, April, 1917, page 286.) 

Under the provisions of section 13 a member character 
bank may accept for any one customer in excess of of 8ecurity 
ten per cent, of its capital and surplus, provided 
it is secured by attached documents or by some 
other actual security growing out of the same trans- 
action as to all acceptances in excess of that ten 
per cent, limitation. 

(Opinion of Counsel, Federal Reserve Bulletin, April, 1919. 
page 364.) 



24 



Commercial Banking Practice 



Custody 
of security 



By subsidiary 



By guarantor 



A syndicate of American banks has accepted 
drafts drawn by the A Bank under a credit to 
finance the importation of coffee. The A Bank is 
a subsidiary of the B Bank, which executed the 
acceptance agreement and guaranteed the entire 
credit. As and when shipments are actually made 
the shipping documents are forwarded to the B 
Bank, and such documents and any documents cov- 
ering the coffee after arrival are held by that bank 
as the agent for the accepting banks. 

While it is not necessary that the attached docu- 
ments or other security be in the physical posses- 
sion of the accepting bank, since possession by an 
agent is in law possession by the principal, the 
Board is of the opinion, and has heretofore ruled, 
that the accepting bank is not secured in compliance 
with this provision when documents are held by the 
drawer of the drafts for account of the acceptor. 
So, also, the Board is of the opinion that the pro- 
vision is not complied with if documents are held 
by the acceptor's customer ; that is, by a party upon 
whose credit the acceptor relied in accepting the 
drafts. 

The fact that the drawer of the drafts is a sub- 
sidiary of the B Bank does not of itself prevent 
the latter bank from being a proper party to hold 
security for the accepting banks, but the fact that 
the B Bank arranged and guaranteed the credit 
indicates that that bank is the customer or one of 
the customers whose credit the accepting banks 
relied upon in making the acceptances. 

The Board is of opinion, therefore, that upon 
the facts stated the accepting banks are not secured 
within the meaning of the provision of section 13 
when the documents are held by the B Bank for 



Bank Acceptances 25 

account of the accepting banks, and, consequently, 
that no member bank should have outstanding ac- 
ceptances drawn under this credit in excess of ten 
per cent, of its capital and surplus, unless some 
arrangement is made whereby the documents are 
to be held by some other party. 

(Ruling, Federal Reserve Bulletin, April, 1921, page 418.) 

The only doubtful question is as to what consti- What constitutes 
tutes "some other actual security growing out of growing'oirtof 
the same transaction as the acceptance." The ten 8ame tran8actio » 
per cent, limit does not apply where the acceptor 
holds : 

1. Shipping documents ; 

2. Warehouse receipts ; 

3. Trust receipts which do not enable the bor- 

rower to obtain the goods for his own use. 

The ten per cent, limit does apply where the 
bank holds merely the ordinary trust receipt which 
gives it only a lien on the goods in the hands of 
the purchaser or on their proceeds. 

(Ruling, Federal Reserve Bulletin, April, 1917, page 286.) 

If an acceptance is secured by shipping docu- Trustreceipts 
ments which are surrendered by the acceptor for security 
a trust receipt which permits the purchaser of the 
goods to retain control of the goods, the accepting 
bank cannot be said to be secured "by some other 
actual security" as provided in section 13 of the 
Federal Reserve Act. A trust receipt, however, 
which does not permit the purchaser to procure 
control of the goods, may properly be said to be 
actual security within the meaning of the Act. 

(Opinion of Counsel, Federal Reserve Bulletin, November, 
1917, page 881.) 

Where the total amount accepted for any one 



26 



Commercial Banking Practice 



Substitution 
of security 



Trade acceptance 
as actual 
security 



customer exceeds ten per cent, of the capital and 
surplus of the accepting bank the security cannot 
be released unless some other actual security grow- 
ing out of the same transaction is substituted there- 
for. A trust receipt which permits the customer 
for whom the draft is accepted to obtain control of 
the goods is not actual security for the purposes 
of this provision of the law. 

(Ruling, Federal Reserve Bulletin, March, 1919, page 253.) 

A corporation ships goods consigned to its own 
agent; it draws a time draft on its own bank with 
the bills of lading attached; the bank accepts, the 
acceptance being in excess of ten per cent, of its 
capital and surplus. The question is whether the 
bills of lading may be released by the bank to the 
agent who is the consignee, provided that the agent 
substitutes therefor other drafts secured by bills of 
lading covering the same goods which were being 
shipped by the agent to various dealers. The Board 
is of the opinion that the new drafts, secured by 
bills of lading covering the same goods, do consti- 
tute some other actual security. This security is 
not only an actual security within the meaning of 
the Act, but it grows out of the same transaction 
as the original acceptance, and therefore, the sub- 
stitution may properly be made. 

(Ruling, Federal Reserve Bulletin, May, 1919, page 468.) 

An exporter draws a documentary draft on a 
foreign purchaser and uses the export draft as secur- 
ity for a ninety-day draft against his bank in an 
amount in excess of ten per cent, of the bank's 
capital and surplus. The bank accepts the ninety- 
day draft and forwards the export draft for ac- 
ceptance. The foreign buyer accepts the draft, 



Bank Acceptances 87 

which thereupon becomes a trade acceptance, and 
receives the shipping documents. 

The trade acceptance drawn on and accepted by 
the foreign buyer may be considered "actual secur- 
ity" within the meaning of section 13 of the Fed- 
eral Reserve Act. 

(Ruling, Federal Reserve Bulletin, October, 1920, page 
1065.) 

Relation of United States Revised Statutes, Section 5200, to 
the Ten Per Cent. Limit. 

The limitations imposed by section 5200, Re- when not 
vised Statutes, on the amount of money which may a w hcaUe 
be borrowed by any individual from a member bank 
do not apply to acceptances of such bank unless 
purchased by the accepting bank. 

A member bank may legally purchase its own When section 
acceptances, but such a transaction is equivalent to 5200 applles 
a loan or advance to the customer for whom the ac- 
ceptance was made and the liability of such cus- 
tomer becomes subject to the limitations of section 
5200, Revised Statutes. 

(Opinion of Counsel, Federal Reserve Bulletin, December, 
1916, page 680.) 

Where a national bank has already loaned ten Acceptances 
per cent, of its capital and surplus to a certain to loans 
company, it may, while the loan is still outstanding, 
obligate itself as acceptor on a draft drawn by the 
same company. 

If, however, the member bank discounts its own Exception 
acceptance under the foregoing circumstances, it 
must treat the transaction as a loan and not as an 
acceptance, and could not in that case lend to, and 
accept for, the same firm in an aggregate amount in 
excess of the ten per cent, prescribed by section 
5200. 

(Ruling, Federal Reserve Bulletin, March, 1918, page 
197.) 



Commercial Banking Practic 



When drawer 
fails to provide 
funds to meet 
acceptance 



Fifty per 
cent, limit 



Acceptances 
up to 100 per 
cent. 



Application 
for power to 
accept up to 
100 per cent. 



The ten per cent, limitation imposed by section 
5200 of the Revised Statutes is not intended to ap- 
ply to the mere acceptance of a bill of exchange, 
but the provisions of section 5200 would apply to 
the indebtedness arising between the drawer of the 
bill and the accepting bank in case the drawer fails 
to furnish funds with which to meet the acceptance 
at maturity. 

(Ruling, Federal Reserve Bulletin, September, 1915, page 
269, February, 1916, page 64.) 

AGGREGATE AMOUNT BANK MAY ACCEPT 
Statutory Provisions 

No bank shall accept such bills to an amount 
equal at any time in the aggregate to more than 
one-half of its paid-up and unimpaired capital stock 
and surplus : Provided, however, That the Federal 
Reserve Board, under such general regulations as 
it may prescribe, which shall apply to all banks 
alike regardless of the amount of capital stock and 
surplus, may authorize any member bank to accept 
such bills to an amount not exceeding at any time 
in the aggregate one hundred per centum of its 
paid-up and unimpaired capital stock and surplus. 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

1. Under the provisions of the law referred to 
above the Federal Reserve Board has determined 
that any member bank, having an unimpaired sur- 
plus equal to at least twenty per centum of its paid- 
up capital, which desires to accept drafts or bills of 
exchange drawn . . . [against domestic or foreign 
shipments of goods or secured by warehouse re- 
ceipts], up to an amount not exceeding at any 
time, in the aggregate, one hundred per centum of 



Report on 



Bank Acceptances 

its paid-up and unimpaired capital stock and sur- 
plus, may file an application for that purpose with 
the Federal Reserve Board. Such application must 
be forwarded through the Federal reserve bank of 
the district in which the applying bank is located. 

2. The Federal reserve bank shall report to 
the Federal Reserve Board upon the standing of application 
the applying bank, stating whether the business and 
banking conditions prevailing in its district war- 
rant the granting of such applications. 

3. The approval of any such application may 
be rescinded upon ninety days' notice to the bank 
affected. 

(Regulation C, Series of 1920, A, II.) 

Opinions and Rulings 

Authority from the Federal Reserve Board is Permission to 
not necessary for a member bank to undertake ac- yjSSlt 
ceptance business, unless the bank wishes to exceed »»•* required 
fifty per cent, of its capital and surplus. 

(Ruling, Federal Reserve Bulletin, July, 1915, page 126.) 

Where a bank has been granted permission to increase of 
accept in an amount not exceeding in the aggregate sur P !us 
one hundred per cent, of its paid-up capital and 
surplus, it is not necessary for such bank to obtain 
additional authority from the Board each time it 
increases its surplus. 

(Ruling, Federal Reserve Bulletin, February, 1919, page 
14-3.) 

Drafts accepted by foreign correspondents at Acceptances of 
the request and under the guarantee of a national SEntTOran-* 
bank in the United States should be reported as tee ° f ., . 

± national bank 

a direct liability of such national bank, and should 
be treated as subject to the limitations imposed by 



80 



Commercial Banking Practici 



Purchase of 
bank's own 
acceptance 



Limitations 
of section 



Letters of 
credit 
not limited 
by section 5202 



Letters of 
credit not 
limited by 
section 13 



the Federal Reserve Act on the acceptance power 
of national banks. 

(Opinion of Counsel, Federal Reserve Bulletin, April, 
1918, page 311. See also "Letters of Credit and Acceptances 
Issued for Correspondents," pages 59-63, below.) 

When a member bank purchases its own accept- 
ance before maturity such acceptance need not be 
included in the aggregate of acceptances author- 
ized by section 13. 

(Opinion of Counsel, Federal Reserve Bulletin, August, 
1916, page 397. See also "Purchase by National Bank of 
its own Acceptances," pages 67-68, below.) 

The limitations imposed by section 5202, Revised 
Statutes, on the liabilities incurred by any national 
bank do not apply to acceptances of such banks. 

(Opinion of Counsel, Federal Reserve Bulletin, December, 
1916, page 680.) 

Inasmuch as a commercial letter of credit is 
simply an agreement to make acceptances, and the 
authority of national banks to issue such letters of 
credit is incidental to the authority expressly 
granted by section 13 of the Act to make accept- 
ances in certain transactions, and such letters may 
properly be issued only in connection with the kinds 
of transactions specified in that section, it seems 
clear that the liability of a member bank upon a 
commercial letter of credit is a liability incurred un- 
der the provisions of the Federal Reserve Act, and 
is not subject to the limitations of section 5202 of 
the Revised Statutes. 

The Board is further of the opinion that the 
liability incurred upon a commercial letter of credit 
— that is, upon the agreement or letter itself, as dis- 
tinguished from the acceptances made thereunder — 
should not be classified as an acceptance liability 
within the limitation imposed upon the aggregate 



Bank Acceptances 81 

amount of acceptances outstanding at any one time 
under the provisions of section 13 of the Federal 
Reserve Act. It would seem that a member bank 
may issue a letter of credit, the aggregate amount 
of which may be in excess of the fifty per cent, or 
one hundred per cent, of the bank's capital and sur- 
plus, provided that the aggregate amount of the ac- 
ceptances made under the letter of credit and out- 
standing at any one time does not exceed, in addi- 
tion to the bank's other outstanding acceptances, 
the aggregate limitation upon acceptances pre- 
scribed in section 13. 

Nevertheless, a member bank should not obligate Reasonable 
itself to accept drafts under a letter of credit to Inu 
such an amount that it is reasonable to anticipate 
that the aggregate amount of acceptances issued 
under that letter and outstanding at any time, to- 
gether with other acceptances which may be out- 
standing, will exceed at any one time the limitation 
to which the member bank is subject. 

(Opinion of Counsel, Federal Reserve Bulletin, July, 1921, 
page 816.) 



Bank Acceptances Based on Domestic 
Shipments of Goods 

CHARACTER 
Statutory Provisions 

Acceptance* Any member bank may accept drafts or bills of 

in domestic ■, i . . * . , 

trade exchange drawn upon it . . . which grow out 

of transactions involving the domestic shipment of 
goods provided shipping documents conveying or 
securing title are attached at the time of acceptance. 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

H'sjffity A draft drawn by the purchaser of the goods 

on security against a national bank is not eligible for accept- 

ance by that bank merely because it is secured by a 
bill of lading covering the goods bought. 

The law contemplates some actual connection be- 
tween the acceptance of the draft and the transac- 
tion involving the sale and shipment of the goods 
— that is, it was evidently intended that the draft 
should be drawn to finance that transaction. If a 
seller ships goods and mails the bill of lading to the 
purchaser and on arrival of the bill of lading the 
purchaser draws on his own bank, attaching the 
bill of lading as security, and offers it for accept- 
ance, the transaction is merely a straight loan to 
the drawer secured by a bill of lading. As such it 
would not come within the spirit of the provisions 
of section 13. 

(Opinion of Counsel, Federal Reserve Bulletin, May, 1917, 
page 380.) 



34 



Commercial Banking Practice 



Application 
of proceeds 



Automobiles 
and tires 



Shipment 
of oil 



A draft drawn by the purchaser of goods is not 
eligible for acceptance merely because it is secured 
at the time of acceptance by a bill of lading cover- 
ing the goods bought. It must be established that 
the proceeds of the draft are applied to the pay- 
ment of those goods. 

(Opinion of Counsel, Federal Reserve Bulletin, January, 
1920, page 66.) 

The ruling that automobiles and tires cannot 
properly be considered readily marketable staples 
should not be construed to deny the right of a 
member bank to accept a draft to which is at- 
tached at the time of acceptance a bill of lading 
covering an automobile or automobile tires in the 
process of shipment, provided that the draft other- 
wise complies with the terms of the law and the 
regulations of the Federal Reserve Board. 

(Ruling, Federal Reserve Bulletin, January, 1920, page 
65.) 

An oil-producing company had contracted to sell 
oil for cash to an oil-distributing company and the 
latter had, in turn, contracted to sell the oil on 
credit to a railroad company. The distributing 
company wished to draw drafts upon the national 
bank, secured at the time of acceptance by bills 
of lading covering the oil in transit from the pro- 
ducing company to the railroad company and with 
the proceeds of the accepted drafts to pay the pro- 
ducing company for the oil. 

The drafts drawn by the distributing company 
would be eligible for acceptance by the national 
bank, providing the bank is secured at the time of 
acceptance by shipping documents which convey or 
secure title to the oil, and provided, further, that 



Bank Acceptances 35 

the drafts comply in all other respects with the 
terms of the law and the regulations. 

(Ruling, Federal Reserve Bulletin, March, 1921, page 308.) 

A member bank may properly accept a draft ^jg™ e t nt 
drawn against the shipment of goods from a cor- sale 
poration to its agent or branch even though no sale 
of the goods is involved in the transaction. 

In any case where a draft is drawn against a Maturity 
shipment of goods in a transaction which does not 
involve the sale of those goods, the maturity of the 
draft should approximate the duration of their 
transit. In such a case the law contemplates that 
the acceptance of the draft should be for the pur- 
pose of financing the shipment, and that it should 
not be the means of furnishing a credit for any 
other purpose. 

(Ruling, Federal Reserve Bulletin, September, 1917, page 
690.) 

The Board has ruled that a national bank may Shipment 

..„ , ,.of cattle 

accept a draft drawn upon it it secured at the time 
of acceptance by a bill of lading covering a ship- 
ment of cattle to a cattle raiser who has purchased 
them with the intention of fattening and reselling 
them. The period covered by the acceptance, how- 
ever, should not be in excess of the period of credit 
which is usual and reasonably necessary to finance 
transactions of this character. 

(Ruling, Federal Reserve Bulletin, July, 1921, page 815.) 



of documents 



Shipping Documents. 

Under the provisions of section 13, which author- Character 
izes any member bank to accept drafts based upon 
domestic shipments of goods, provided shipping 
documents conveying or securing title are attached, 
such documents must be made out or indorsed so 



36 



Commercial Banking Practice 



Documents 
not re- 
quired to 
be physically 
attached 



Custody of 
documents 



Release of 
documents 



as to convey or secure title to the accepting bank. 

(Opinion of Counsel, Federal Reserve Bulletin, March, 
1918, page 198.) 

A provision of section 13 which authorizes any 
member bank to accept drafts based upon the do- 
mestic shipment of goods, provided shipping docu- 
ments are "attached," should not be construed so 
as to require that the documents be physically fas- 
tened to the draft. It is sufficient if the accepting 
bank has possession of the documents at the time 
of acceptance. 

(Opinion of Counsel, Federal Reserve Bulletin, October, 
1917, page 765.) 

It is entirely consistent with the purposes of the 
Act and a sufficient compliance with its terms if 
shipping documents are in the possession of the 
bank and the bank has a lien on the property rep- 
resented by such documents at the time that such 
bill is accepted. If placed in the possession of the 
bank's agent and under the control of the bank 
such documents could clearly be considered as in 
the possession of the bank. Care should, however, 
be taken that the documents be held for account of 
the accepting bank by a third party who is in no 
way interested in the acceptance transaction. A 
trust receipt of the party for whom the acceptance 
is made would not be looked upon with favor by 
the Board. 

(Ruling, Federal Reserve Bulletin, October, 1918, page 
972.) 

Retention or Release of Documents against Acceptance. 

Question is whether it is necessary, where a do- 
mestic acceptance is based upon a bill of lading, that 
the bank retain the bill of lading or other collateral 
during the life of the acceptance, or may the bank 



Bank Acceptances 37 



release the bill of lading after acceptance. Also, 
whether the same rule will apply in case the accept- 
ance is secured by a warehouse receipt. 

Inasmuch as the statute merely requires the ac- 
cepting bank to be secured in domestic transactions 
by shipping documents or warehouse receipts at the 
time of acceptance, the bank would no doubt have 
the right, if it became necessary to do so, to release 
either the shipping document or the warehouse re- 
ceipt, provided the draft or drafts accepted for one 
person did not exceed ten per cent, of the capital 
and surplus of the accepting bank. 

(Ruling, Federal Reserve Bulletin, July, 1918, page 634.) 

A member bank can not accept in domestic trans- Customer's 
actions without being secured at the time of accept- agree 
ance, but may release the security after acceptance 
upon the execution of a trust receipt or an agree- 
ment by the customer that so much of the proceeds 
of the sale of the goods covered by the security as 
may be necessary to pay the draft will be deposited 
with the accepting bank when available and will 
not be used for other purposes. 

(Ruling, Federal Reserve Bulletin, February, 1919, page 
143.) 

The accepting bank may, if it chooses, release the Release 
security in any case in which the total amount ac- Jo pe r cent. limit 
cepted for any one customer does not exceed ten 
per cent, of its capital stock and surplus. 

(Opinion of Counsel, Federal Reserve Bulletin, March, 
1919, page 255.) 

See also Regulation A, Series of 1920, B, pages 
135-137, below. 



Commercial Banking Practice 



Maturity not 
to exceed six 
months 



Credit agree- 
ment for more 
than six 
months 



Determination 
of maturity 



Renewal 
acceptances 



MATURITY 
Statutory Provisions 

Any member bank may accept drafts or bills of 
exchange drawn upon it having not more than six 
months' sight to run, exclusive of days of grace. 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

While a letter of credit or credit agreement may 
be lawfully made by a national bank which will 
extend by its terms for a period exceeding six 
months, the agreement must not be of such a char- 
acter as will impose upon the holders of the drafts 
accepted thereunder any obligation to renew such 
drafts so that the period of acceptance shall exceed 
six months in duration as to any specified draft. 

(Ruling, Federal Reserve Bulletin, September, 1915, page 
269.) 

Where a six months' credit is required it is im- 
proper to grant that credit by means of two three 
months' acceptances for the purpose of making the 
acceptances at all times eligible for rediscount by 
Federal reserve banks. On the other hand, the 
period covered by an acceptance should not be in 
excess of that which is usual and reasonably neces- 
sary to finance the underlying transaction. 

(Ruling, Federal Reserve Bulletin, March, 1921, page 308.) 

No national bank may properly accept the re- 
newal of a draft drawn by the purchaser of goods 
and secured at the time of original acceptance by a 
bill of lading or warehouse receipt unless the re- 
newal acceptance complies with the terms of the 
law and the rulings and regulations of the Board 
applicable to the original acceptance. 

(Opinion of Counsel, Federal Reserve Bulletin, January, 
1920, page 66.) 



Bank Acceptances 39 

In any case where a draft is drawn against a shipment 
shipment of goods in a transaction which does not ™i e ° u 
involve the sale of those goods, the maturity of the 
draft should approximate the duration of their 
transit. In such a case the law contemplates that 
the acceptance of the draft should be for the pur- 
pose of financing the shipment, and that it should 
not be the means of furnishing a credit for any other 
purpose. 

(Ruling, Federal Reserve Bulletin, September, 1917, page 
690.) 

The period during which the acceptances are to Drafts to 
run should have some relation to the period of time shipment 
actually required for the shipment. The acceptance on,y 
of drafts secured by bills of lading for the primary 
purpose of providing the borrower with working 
capital during the period required to manufacture 
and resell the goods covered by the bills of lading 
is an abuse of the domestic acceptance privilege. 

(Ruling, Federal Reserve Bulletin, December, 1920, page 
1301.) 

AMOUNT BANK MAY ACCEPT FOR ONE INTEREST 

See "Bank Acceptances Based on Imports and 
Exports," pages 21-28, above. 

AGGREGATE AMOUNT BANK MAY ACCEPT 
Statutory Provisions 

No bank shall accept such bills to an amount Acceptances 
equal at any time in the aggregate to more than p^ent? 
one-half of its paid-up and unimpaired capital stock 
and surplus: Provided, however, That the Federal 
Reserve Board, under such general regulations as 
it may prescribe, which shall apply to all banks 



40 



Commercial Banking Practice 



Domestic 
acceptances not 
to exceed 
50 percent. 



Application 
of limit 



Authority of 
Federal Reserve 
Board 



alike regardless of the amount of capital stock and 
surplus, may authorize any member bank to accept 
such bills to an amount not exceeding at any time 
in the aggregate one hundred per centum of its 
paid-up and unimpaired capital stock and surplus :* 
Provided, further, That the aggregate of accept- 
ances growing out of domestic transactions shall in 
no event exceed fifty per centum of such capital 
stock and surplus. 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

The fifty per cent, limit relates to drafts or bills 
drawn against a bank in domestic transactions and 
accepted by that bank. It does not relate to drafts 
drawn by an individual against some other drawee 
which are accepted by the drawee and discounted 
by the bank. 

The Federal Reserve Board is without authority 
to permit a member bank to accept drafts drawn 
against it in domestic transactions in excess of fifty 
per cent, of the capital and surplus of the accepting 
bank. It may authorize a member bank to accept 
drafts up to one hundred per cent., which amount 
may include both those which grow out of transac- 
tions involving the exportation or importation of 
goods and those which grow out of domestic trans- 
actions; but the statute limits specifically the 
amount that may be accepted in domestic transac- 
tions to fifty per cent, of the capital and surplus of 
the accepting bank. 

(Ruling, Federal Reserve Bulletin, November, 1918, page 
1119.) 



*For regulations governing acceptance of domestic and for- 
eign drafts up to an aggregate of one hundred per cent, of 
bank's capital and surplus, see "Bank Acceptances Based on 
Imports and Exports," pages 28-31, above. 



Bank Acceptances 41 

When a member bank purchases its own accept- Purchase of 
ance before maturity such acceptance need not be JjjJJjJJ 
included in the aggregate of acceptances author- 
ized by section 13. 

(Opinion of Counsel, Federal Reserve Bulletin, August, 
1916, page 397. See also "Purchase by National Bank of 
its own Acceptances," pages 67-68, below.) 

The limitations imposed by section 5202, Revised Section 5202 
Statutes, on the liabilities incurred by any national ^acceptances 
bank do not apply to acceptances of such banks. 

(Opinion of Counsel, Federal Reserve Bulletin, December, 
1916, page 680.) 

Inasmuch as a commercial letter of credit is Letters of 
simply an agreement to make acceptances, and the ihnitecTby 
authority of national banks to issue such letters of section 5202 
credit is incidental to the authority expressly 
granted by section 13 of the Act to make accept- 
ances in certain transactions, and such letters may 
properly be issued only in connection with the kinds 
of transactions specified in that section, it seems 
clear that the liability of a member bank upon a 
commercial letter of credit is a liability incurred 
under the provisions of the Federal Reserve Act, 
and is not subject to the limitations of section 5202 
of the Revised Statutes. 

The Board is further of the opinion that the lia- Letters of 
bility incurred upon a commercial letter of credit — limited by 
that is, upon the agreement or letter itself, as dis- seclIon 13 
tinguished from the acceptances made thereunder — 
should not be classified as an acceptance liability 
within the limitation imposed upon the aggregate 
amount of acceptances outstanding at any one time 
under the provisions of section 13 of the Federal 
Reserve Act. It would seem that a member bank 
may issue a letter of credit, the aggregate amount 



42 Commercial Banking Practice 

of which may be in excess of the fifty per cent, or 
one hundred per cent, of the bank's capital and sur- 
plus, provided that the aggregate amount of the ac- 
ceptances made under the letter of credit and out- 
standing at any one time does not exceed, in addi- 
tion to the bank's other outstanding acceptances, 
the aggregate limitation upon acceptances pre- 
scribed in section 13. 
Reasonable Nevertheless, a member bank should not obligate 

Umit itself to accept drafts under a letter of credit to 

such an amount that it is reasonable to anticipate 
that the aggregate amount of acceptances issued 
under that letter and outstanding at any time, to- 
gether with other acceptances which may be out- 
standing, will exceed at any one time the limitation 
to which the member bank is subject. 

(Opinion of Counsel, Federal Reserve Bulletin, July, 1921, 
page 816.) 



Bank Acceptances Secured by 
Warehouse Receipts 

CHARACTER 
Statutory Provisions 

Any member bank may accept drafts or bills of 
exchange drawn upon it . . . which are secured 
at the time of acceptance by a warehouse receipt 
or other such document conveying or securing title 
covering readily marketable staples. 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

A readily marketable staple . . . may be defined Readily 
as an article of commerce, agriculture, or industry 2J2j[ ab,e 
of such uses as to make it the subject of constant 
dealings in ready markets with such frequent quo- 
tations of price as to make (a) the price easily and 
definitely ascertainable and (b) the staple itself 
easy to realize upon by sale at any time. 

(Regulation C, Series of 1920, A, I, note.) 

Opinions and Rulings 

Readily Marketable Staples. 

Although the law does not expressly restrict Perishable 
eligible staples to those which are nonperishable, stap,es 
nevertheless banks as a matter of prudence and 
protection to themselves should not consider as 
eligible any staple which is in its nature so perish- 
able as not to be reasonably sure of maintaining its 
value as security at least for the life of the draft 
which is drawn against it. 

(Ruling, Federal Reserve Bulletin, July, 1919, page 652.) 



Bank Acceptances 45 

Potatoes properly graded and packed and stored Pot »toe« 
in a weather-proof and responsible warehouse, as 
evidenced by its receipt, would undoubtedly consti- 
tute a readily marketable nonperishable staple. 

(Ruling, Federal Reserve Bulletin, August, 1917, page 614.) 

The term "staples" includes manufactured goods Cotton yarns 
as well as raw materials, provided the goods are 
nonperishable and have a wide ready market. Cot- 
ton yarns and flour are held to be such staples. 

(Ruling, Federal Reserve Bulletin, October, 1916, page 
523.) 

A warehouse receipt covering whiskey in bond Whiskey 
which can be removed only for very specific and 
limited purposes is not a receipt conveying or 
securing title to "readily marketable staples" 
within the meaning of that section. 

(Ruling, Federal Reserve Bulletin, May, 1920, page 494.) 

The Board is of the opinion that a warehouse Sacramental 
receipt covering wine in bond, whether intended wule 
for sacramental or other purposes, can not be con- 
sidered a receipt conveying or securing title to 
"readily marketable staples" within the meaning 
of section 13 of the Federal Reserve Act. 

(Ruling, Federal Reserve Bulletin, April, 1921, page 419.) 

An automobile is not a readily marketable staple Automobiles 
within the meaning of the definition. Automobile 
tires cannot properly be considered readily market- 
able staples. 

(Ruling, Federal Reserve Bulletin, January, 1920, page 65.) 
Eligible Security. 

No draft which is secured by a warehouse receipt Term of 
should properly be considered eligible for accept- slorage 
ance under the terms of section 13 of the Federal 



46 



Commercial Banking Practic 



Foreign 

warehouse 

receipts 



Warehouse receipts 
to be issued by 
independent 
warehouses 



Relation between 
borrower and ware- 
house corporation 



Reserve Act unless the goods covered by the ware- 
house receipt are being held in storage pending a 
reasonably immediate sale, shipment, or distribu- 
tion into the process of manufacture. 

(Ruling, Federal Reserve Bulletin, September, 1919, page 
858.) 

A draft drawn abroad, payable in the United 
States in dollars and secured by a warehouse re- 
ceipt covering readily marketable staples stored in 
a warehouse located in a foreign country, is eligible 
for acceptance by a member bank. 

(Opinion of Counsel, Federal Reserve Bulletin, August, 
1919, page 740.) 

Warehouse receipts offered as security for bills 
accepted by member banks must be issued by ware- 
houses which are independent of the borrower. 

Where a corporation is formed as a subterfuge 
for the purpose of evading the spirit of the Board's 
ruling, this fact should be taken into consideration 
by a member bank accepting the bill and by the 
Federal reserve bank to which it is offered for dis- 
count. 

If the borrower exercises such control over the 
corporation issuing the warehouse receipt as to give 
him control over the goods in storage, the purpose 
of requiring a receipt of the independent ware- 
houseman would be defeated. The corporation is- 
suing such receipt must be organized in good faith 
as an independent corporation and its affairs must 
be administered by duly authorized officers and 
agents independent of the borrower. 

(Ruling, Federal Reserve Bulletin, January, 1918, page 31.) 

The requirements of the Board appear to have 
been met where a separate corporation has been 



BiNK Acceptances 47 

created and the warehouse receipts are issued by 
that corporation and not by the borrower. How- 
ever, where both corporations have practically the 
same officers, the manager of the warehouse ap- 
pointed to execute the receipts should not be an 
employee of the borrowing company, as the Board 
requires that the receipts should be issued by a 
company independent of the borrower, and this re- 
quirement should be met in substance as well as in 
form. 

(Ruling, Federal Reserve Bulletin, September, 1918, page 
862.) 

A borrowing corporation takes receipts for goods 
and materials stored in a warehouse controlled by a 
separate corporation engaged solely in the ware- 
house business, the entire stock of which is owned 
by the prospective borrower. 

If a representative of the accepting bank is given Control of 
control of the warehouse under a proper resolution JJJjJjJJf by 
of the directors of the warehouse corporation, the representative 
fact that the stock of the corporation is owned by 
the borrower should not prevent the acceptance of 
drafts secured by the warehouse receipts. 

It should be agreed, however, that if by any fu- 
ture action of the warehouse corporation an attempt 
is made to exercise control over the warehouse, the 
representative of the acceptor should have the right 
to move the goods and to place them in storage else- 
where at the expense of the warehouse corporation. 

(Ruling, Federal Reserve Bulletin, September, 1918, page 
862.) 

A canned goods concern proposes to place part Warehouse receipts 
of its readily marketable goods and materials in IS8Ued by ,essee 
storage with a lessee of part of its premises. The 
lessee is then to issue warehouse receipts to the 



48 



Commercial Banking Practic 



Receipt of cus- 
todian of wool as 
warehouse receipt 



Acceptance of 
drafts against 
sugar in bond 



owner of the goods, which receipts are to be used as 
security for drafts drawn against and accepted by 
a member bank. 

If the premises in question are actually tinned 
over to the lessee under a bona fide lease, the lessee 
being independent of the borrower and having en- 
tire custody and control of the goods, there would 
seem to be no objection to a member bank's ac- 
cepting drafts against the security of warehouse re- 
ceipts issued by such lessee. It should, however, be 
expressly understood and agreed that the borrower 
shall not have access to the premises except with the 
permission of the lessee and that he shall exercise no 
control of any sort over the goods against which 
warehouse receipts are issued. The warehouse re- 
ceipts must, of course, be in form properly to con- 
vey and secure title to the bank. 

(Ruling, Federal Reserve Bulletin, July, 1918, page 634.) 

It being understood that wool is stored in build- 
ings under control of custodian entirely indepen- 
dent of borrower, custodian's certificate or receipt, 
if issued in proper form to convey or secure title, 
may be treated as a warehouse receipt within the 
meaning of section 13 of the Federal Reserve Act 
and acceptance of member bank under such condi- 
tions would be eligible for rediscount. 

(Ruling, Federal Reserve Bulletin, July, 1918, page 636.) 

It is the understanding of this office that sugar 
referred to is placed in bond under transit entry 
and warehouse receipt issued by collector in nego- 
tiable form, but sugar can not be withdrawn for 
domestic sale or consumption without special per- 
mission of Treasury Department. Board is of 
opinion that member banks may legally accept 



Bank Acceptances 49 

drafts drawn against security of such warehouse 
receipt properly assigned. 

(Ruling, Federal Reserve Bulletin, June, 1918, page 520.) 

A draft drawn by a cooperative marketing asso- Drafts of 
ciation is eligible for acceptance when secured at the awSSms 
time of acceptance by a negotiable warehouse re- 
ceipt covering nonperishable agricultural commodi- 
ties to which the association has title and which are 
stored in independent warehouses. 

(Ruling, Federal Reserve Bulletin, August, 1921, page 963.) 
Ineligible Security. 

Any draft which is drawn to carry goods for Speculative 
speculative purposes or for any indefinite period of 
time without the purpose to sell, ship, or manufac- 
ture within a reasonable time, should not be con- 
sidered eligible for acceptance under the provisions 
of section 13. Such a draft would be merely a cloak 
to evade the restrictions of section 5200 of the Re- 
vised Statutes and is not one of the kinds which 
Congress intended to make eligible for acceptance. 

(Ruling, Federal Reserve Bulletin, September, 1919, page 
858.) 

A draft is drawn by a cotton factor and secured Draft* of 
at the time of acceptance by a warehouse receipt factor 
covering cotton consigned to the factor for the pur- 
pose of sale. Any draft drawn under the circum- 
stances described, where it appears that the pro- 
ceeds are to be used not for a commercial purpose 
but for the purpose of lending to the factor's cus- 
tomers, is not eligible for acceptance by a member 
bank. 

(Ruling, Federal Reserve Bulletin, February, 1920, page 
162.) 



60 
Cattle 



Collateral 
notes secured 
by chattel 
mortgages 



Bills of sale 



Commercial Banking Practice 

Drafts or bills of exchange drawn in domestic 
transactions against a national bank can not, under 
authority of section 13, be accepted when secured 
by a chattel mortgage on cattle but only when ac- 
companied by shipping documents or when secured 
by a warehouse receipt or other similar document 
conveying or securing title to readily marketable 
staples. 

While cattle may be treated as readily marketable 
staples, a chattel mortgage is not considered a docu- 
ment similar to a warehouse receipt, since the bor- 
rower retains the possession of the goods and con- 
veys to the bank only the legal title. 

(Ruling, Federal Reserve Bulletin, April, 1918, page 309.) 

A national bank is not authorized to accept a 
draft secured by collateral notes which are in turn 
secured by chattel mortgages on cattle. 

(Ruling, Federal Reserve Bulletin, September, 1917, page 
690.) 

Member banks are not authorized to accept drafts i 
of a cattle-loan company secured by notes of the 
owner of the cattle, although such notes may be se- 
cured by a chattel mortgage executed by the owner 
of the cattle to the cattle-loan company and the 
notes and chattel mortgage accompany the draft at 
the time of acceptance. 

(Opinion of Counsel, Federal Reserve Bulletin, Septem- 
ber, 1918, page 871.) 

A bill of sale is not a receipt similar to a ware- 
house or terminal receipt; it is merely in substance 
a chattel mortgage to goods in the hands of the 
drawer and not a receipt for goods sold in the hands 
of some third party "independent of the borrower." 

(Opinion of Counsel, Federal Reserve Bulletin, December, 
1916, page 684-.) 



Bank Acceptances 51 

The acceptance of a draft by a member bank ^2J.*J no1 
against an acceptance agreement which purports 
to assign to the bank certain collateral security, but 
which does not specifically mention any security as 
assigned, is an ordinary accommodation acceptance, 
and is not authorized by law. 

(Opinion of Counsel, Federal Reserve Bulletin, April, 1913, 
page 311.) 

Substitution of Warehouse Receipts. 

It is held that there is no objection to permitting Substitution 
mills to substitute other warehouse receipts for cot- 
ton receipts during the life of an acceptance. 

(Ruling, Federal Reserve Bulletin, January, 1917, page 30.) 

For rulings governing the release of warehouse Release 
receipts after acceptance, see pages 36-37, above. 
See also Regulation A, Series of 1920, B, pages 
135-137, below. 

MATURITY 

Although a national bank may accept drafts Acceptances 
drawn upon it having not more than six months' renewal 
sight to run which are secured at the time of accept- 
ance by a warehouse receipt conveying or securing 
title covering readily marketable staples, neverthe- 
less, such an acceptance must not be made subject 
to any renewals. 

(Opinion of Counsel, Federal Reserve Bulletin, March, 
1920, page 277.) 

A member bank can not agree unconditionally 
to accept a renewal draft but can agree only to ac- 
cept in the event that the renewal draft is eligible 
for acceptance under the terms of the law. 

(Ruling, Federal Reserve Bulletin, August, 1921, page 964.) 



52 Commercial Banking Practice 

See also "Bank Acceptances Based on Domestic 
Shipments of Goods," pages 38-39, above. 

AMOUNT BANK MAY ACCEPT FOR ONE INTEREST 

See "Bank Acceptances Based on Imports and 
Exports," pages 21-28, above. 

AGGREGATE AMOUNT BANK MAY ACCEPT 

See "Bank Acceptances Based on Domestic 
Shipments of Goods," pages 39-42, above. 



Bank Acceptances Executed to Furnish 
Dollar Exchange 

CHARACTER 

Statutory Provisions 

Any member bank may accept drafts or bills of A o c r c |i p } ance8 
exchange drawn upon it having not more than three exchange 
months' sight to run, exclusive of days of grace, 
drawn under regulations to be prescribed by the 
Federal Reserve Board by banks or bankers in for- 
eign countries or dependencies or insular posses- 
sions of the United States for the purpose of fur- 
nishing dollar exchange as required by the usages 
of trade in the respective countries, dependencies, 
or insular possessions. 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

Any member bank desiring to accept drafts Application for 

i i i i ii 7> • permission 

drawn by banks or bankers in foreign countries or to accept 
dependencies or insular possessions of the United 
States for the purpose of furnishing dollar ex- 
change shall first make an application to the Fed- 
eral Reserve Board setting forth the usages of trade 
in the respective countries, dependencies, or insular 
possessions in which such banks or bankers are 
located. 

If the Federal Reserve Board should determine Conditions 
that the usages of trade in such countries, depen- ° approva 
dencies, or possessions require the granting of the 
acceptance facilities applied for, it will notify the 
applying bank of its approval and will also publish 



law 



BankAcceptances 55 

in the Federal Reserve Bulletin the name or names 
of those countries, dependencies, or possessions in 
which banks or bankers are authorized to draw on 
member banks whose applications have been ap- 
proved for the purpose of furnishing dollar ex- 
change. 

The Federal Reserve Board reserves the right 
to modify or on ninety days' notice to revoke its ap- 
proval either as to any particular member bank or 
as to any foreign country or dependency or insular 
possession of the United States in which it has au- 
thorized banks or bankers to draw on member banks 
for the purpose of furnishing dollar exchange. 

(Regulation C, Series of 1920, B, II.) 

Announcements of Federal Reserve Board 

The purpose of this Act and the regulation made £™P° se of 
pursuant thereto was to enable the American banks 
to provide dollar exchange in countries where the 
check is not the current means of remittance in pay- 
ment of foreign debts, but where the three months' 
bankers' draft is generally used for that purpose. 

The Board is informed that the bankers' custom 
of selling three months' drafts in preference to Origin of 
checks originated in countries where the mail con- whicVrequire 
nections were irregular and the foreign exchange suchaccept- 
market was a limited one, and where it would have 
been difficult for the drawing banker to be certain 
that he could find a cover against the checks drawn 
by him in time to forward it by the same mail, 
whereas, in drawing a three months' draft, he would 
feel assured of being able to forward remittances 
before his obligation fell due. Such conditions do 
not exist in relations between England and France 
and the United States. 

(Announcement, Federal Reserve Bulletin, December, 1916, 
page 665.) 



56 



Commercial Banking Practice 



Countries 
whose trade 
usages warrant 
such accept- 
ances 



Central and 
South America 



Permission 
extended 



Under the provisions of section 13 of the Federal 
Reserve Act, which provides that member banks, 
with the approval of the Federal Reserve Board, 
may accept drafts for the purpose of furnishing 
dollar exchange, drawn upon them by banks or 
bankers located in foreign countries or dependen- 
cies or insular possessions of the United States in 
which it is determined that the usages of trade re- 
quire such acceptance facilities, the Board has des- 
ignated as such the following countries and insular 
possessions: Argentina, Bolivia, Brazil, British 
Guiana, British Honduras, Chile, Colombia, Costa 
Rica, Cuba, Dutch Guiana, Ecuador, French Gui- 
ana, Guatemala, Honduras, Nicaragua, Panama, 
Paraguay, Peru, Porto Rico, San Salvador, Santo 
Domingo, Trinidad, Uruguay, and Venezuela. 

(Announcement, Federal Reserve Bulletin, November, 1920, 
page 1175.) 

Member banks with the approval of the Federal 
Reserve Board may accept drafts for the purpose 
of furnishing dollar exchange drawn upon them 
by banks or bankers located in Australia, New Zea- 
land and other Australasian dependencies. [Special 
application is required in these cases.] 

(Announcement, Federal Reserve Bulletin, February, 1921, 
page 188.) 

Opinions and Rulings 

The Federal Reserve Board has not rescinded its 
vote to permit member banks to accept drafts 
drawn upon them by banks or bankers in any Cen- 
tral or South American country for the purpose of 
creating dollar exchange. Permission granted to a 
member bank with respect to any country entitles 
it to exercise similar accepting powers with respect 
to all countries that have been or may hereafter be 



Bank Acceptances 57 

designated by the Board as countries whose usages 
of trade require the furnishing of dollar exchange. 

(Ruling, Federal Reserve Bulletin, November, 1918, page 
1119.) 

If a national bank wishes to accept drafts for the A PP ,icalion 

• i • in i • with respect 

purpose of furnishing dollar exchange with respect to other 
to a country as to which no previous application has countr,e8 
been granted, it should submit to the Board evi- 
dence that the usages of trade in that country are 
such as to require the drawing of drafts of this 
character. An application can not be granted, 
therefore, if it appears that the drafts are to be 
drawn not because the usages of trade so require 
but merely because dollar exchange is at a premium 
in the country where the drafts are to be drawn. 
This ruling, of course, has no bearing upon the 
question of whether particular drafts are eligible 
for acceptance by member banks as drafts which 
grow out of transactions involving the importation 
or exportation of goods. 

(Ruling, Federal Reserve Bulletin, August, 1920, page 835.) 

MATURITY 
Statutory Provisions 

Any member bank may accept drafts or bills Maturity not to 
of exchange drawn upon it [to furnish dollar ex- months 
change] having not more than three months' sight 
to run, exclusive of days of grace. 

(Federal Reserve Act, Section 13.) 

AMOUNT MEMBER BANK MAY ACCEPT FOR 

ONE INTEREST 

Statutory Provisions 

No member bank shall accept such drafts or bills Ten per cent, 
of exchange referred to in this paragraph for any 



S8 Commercial Banking Practice 

one bank to an amount exceeding in the aggregate 
ten per centum of the paid-up and unimpaired cap- 
ital and surplus of the accepting bank unless the 
draft or bill of exchange is accompanied by docu- 
ments conveying or securing title or by some other 
adequate security. 

(Federal Reserve Act, Section 13.) 

AGGREGATE AMOUNT MEMBER BANK MAY 
ACCEPT 



Fifty per cent, 
limit 



Statutory Provisions 

No member bank shall accept such drafts or bills 
in an amount exceeding at any time the aggregate 
of one-half of its paid-up and unimpaired capital 
and surplus. 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

Limit i« ex- ij,^ g^ p er cen ^ jim^ j s separate and distinct 

from and not included in the limits placed upon the 
acceptance of drafts and bills of exchange. . . . 
[drawn against domestic or foreign shipments or 
secured by warehouse receipts.] 

(Regulation C, Series of 1920, B, I.) 
Opinions and Rulings 

Stajplkabl The limitations imposed by section 5202, Revised 

Statutes, on the liabilities incurred by any national 
bank do not apply to acceptances of such banks. 

(Opinion of Counsel, Federal Reserve Bulletin, December. 
1916, page 680.) 



Letters of Credit and Acceptances Issued 
for Correspondents 

Opinions and Rulings 

The Comptroller of the Currency has ruled, un- Agencies of 
der section 5190, United States Revised Statutes, J^ al 
that a national bank located in California may not 
appoint an agent in New York to accept in behalf 
of the bank drafts drawn on it payable in New 
York and to pay such drafts out of the funds de- 
posited in New York under the control of the 
agent. 

(Federal Reserve Bulletin, August, 1920, page 835.) 

National banks for some time have been accus- Guarantee of 
tomed to guarantee letters of credit issued at their e f credit 
request by correspondent banks in large centers on 
behalf of the national bank's customers. For in- 
stance, it appears that where the customer of an in- 
terior national bank desires to obtain a letter of 
credit in connection with his foreign business, the 
national bank, instead of issuing the letter itself, 
will get one of its large city correspondents to issue 
a letter for the customer's account, which the na- 
tional bank guarantees; that is, the national bank 
agrees that in the event the customer for whose ac- 
count the letter is issued fails to put the issuing 
bank in funds to meet the acceptances, the guar- 
anteeing bank will do so. The transaction does not 
always involve the issuance of a letter of credit, for 
the correspondent bank sometimes simply accepts a Guarantee of 
draft drawn upon it by the national bank's cus- 
tomer, and the national bank, in a collateral agree- 
ment with the correspondent bank, guarantees the 



vires 
acts 



60 Commercial Banking Practice 

customer's obligation to put the correspondent bank 
in funds to meet the acceptance. Under the latter 
arrangement, the national bank's liability is the 
same as the ultimate liability which arises out of 
guaranteeing a letter of credit, so that the two 
transactions will be considered as one and the same 
for the purposes of this discussion. 

Ultra Whether or not a national bank has authority to 

guarantee a letter of credit is a question of law 
which in the last analysis must be determined by 
the courts. The Federal Reserve Board is of the 
opinion that a national bank has no authority to 
guarantee or act as surety upon a letter of credit; 
that such acts are ultra vires ; and that if the direc- 
tors of a national bank enter into such contracts of 
guaranty or suretyship, they assume in their per- 
sonal capacities the risk of any loss that may occur. 

Alternative The Board desires to suggest an alternative 

method of financing the business heretofore financed 
by means of letters of credit guaranteed by the 
national banks at whose request the letters are is- 
sued. The Board is of the opinion that this course, 
if adopted, will enable a national bank, with only 
slight modifications as to the manner of handling 
the business, to continue to carry it on without en- 
tering into an ultra vires transaction. Take the 
case of a national bank in an interior community, 
whose customer wishes to obtain a letter of credit 
which will be satisfactory to his foreign dealer. The 
national bank, having no international standing, or 
being without any department capable of handling 
foreign business, does not wish to issue the letter 
itself but is willing to extend its credit to its cus- 
tomer. Under these circumstances, it enters into 
an arrangement with, say, its New York corre- 



method 



Bank Acceptances 61 

spondent, whereby the New York correspondent Agency 
agrees as agent of the interior bank to issue a letter agreemenl 
of credit for the account of the interior bank's cus- 
tomer, the letter to be issued in the name of the 
New York correspondent, but in issuing the letter 
the New York correspondent is to act as agent for 
an undisclosed principal, namely, the interior bank. 
The interior bank's name will not appear on the 
letter of credit, but its New York correspondent 
may look to it for reimbursement under the col- 
lateral agency agreement, not conditionally upon 
the failure of the customer to put the issuing bank 
in funds but directly and unconditionally as the 
real issuer of the letter. The beneficiary of the 
letter and the holders of the acceptances drawn 
thereunder will look to and rely on the credit of 
the New York bank, for its name alone will appear 
on the letter and the acceptances, but the interior 
bank will in fact be the real acceptor and the cus- 
tomer will be under obligation to put the interior 
bank, not the New York bank, in funds to meet 
the acceptances as they mature. The only change 
necessary in the present method is that the interior 
bank, instead of guaranteeing the letter of credit, 
will execute a separate contract appointing its New 
York correspondent its agent, and agreeing uncon- 
ditionally to reimburse the agent as such for any 
moneys paid out, or, if desired, to put the agent in 
funds to meet the acceptances as they mature. It 
would seem that this procedure will meet the prac- 
tical requirements of the situation and at the same 
time avoid the necessity of any contract of 
guaranty. 

The Board is of the opinion that the provisions Agent for 



of section 5190 do not necessarily prevent a national 



specific 
purpose 



62 Commercial Banking Practice 

bank from appointing another bank or banker as its 
agent to issue a letter of credit in the agent's name. 
It is well recognized that, while a national bank 
may not transact any part of its "usual business" 
at another place through an agent, nevertheless it 
may appoint an agent for specific purposes or to 
transact particular kinds of business. Under these 
circumstances, it would seem that a national bank, 
for the purpose of financing its customer's business 
in the manner herein suggested, may appoint a 
domestic or foreign bank or banker as its agent to 
issue in the agent's own name a letter of credit and 
to accept drafts drawn thereunder, provided, that 
the authority conferred is specifically limited to the 
particular transaction involved and that a definite 
limitation is imposed upon the amount of each 
letter of credit. 

of 3 rindai ^ n case ^ e course suggested should be adopted, 

and agent the agent bank, which issues the letter and which 

is primarily and unconditionally liable upon the 
acceptances made thereunder, must include the 
liability on such acceptances, as and when incurred, 
among its general acceptance liabilities subject to 
the limitations on the acceptance power prescribed 
by law; and, inasmuch as the interior bank is by 
hypothesis the real acceptor and is directly and un- 
conditionally liable to the agent bank for any 
moneys paid out to meet the acceptances as they 
mature or to put the accepting bank in funds to 
meet such acceptances, the principal bank also must 
include the amount of the acceptances, as and when 
made, among its general acceptance liabilities sub- 
ject to the limitations of law. 

It should be remembered that the foregoing 
merely represents the Board's opinion as to the 



Bank Acceptances 63 

legality of the proposed plan, and as to the require- 
ments which must be complied with if national 
banks see fit to adopt the plan. In the last analysis, 
the question whether a national bank legally may Question 
appoint a correspondent as its agent in particular ° aw 
transactions to issue a letter of credit and to accept 
drafts drawn thereunder, and whether in other re- 
spects a national bank legally may transact the 
business in the manner suggested, is a question for 
the determination of the courts. It seems advisable, 
however, for the Board to set forth its views with 
regard to the matter under discussion in order that 
its position may be clearly understood. 

This opinion has been submitted to the Comp- 
troller of the Currency and he concurs in the views 
expressed therein. 

(Federal Reserve Bulletin,, May, 1921, page 547.) 



Section 5200, 
Revised Statutes 



Ten per cent 
limit on loans 
to one interest 



Bills of 
exchang 



acceptances 



Documentary 
notes 



Investment in Bank Acceptances by 
National Banks 

Statutory Provisions 

The total liabilities to any association of any 
person or of any company, corporation, or firm for 
money borrowed, including in the liabilities of a 
company or firm the liabilities of the several mem- 
bers thereof, shall at no time exceed ten per centum 
of the amount of the capital stock of such associa- 
tion, actually paid in and unimpaired, and ten per 
centum of its unimpaired surplus fund: Provided, 
however, That ( 1 ) the discount of bills of exchange 
drawn in good faith against actually existing 
values, including drafts and bills of exchange se- 
cured by shipping documents conveying or secur- 
ing title to goods shipped, and including demand 
obligations when secured by documents covering 
commodities in actual process of shipment, and also 
including bankers' acceptances of the kinds de- 
scribed in section 13 of the Federal Reserve Act, 
(2) the discount of commercial or business paper 
actually owned by the person, company, corpora- 
tion, or firm negotiating the same, (3) the discount 
of notes secured by shipping documents, ware- 
house receipts, or other such documents conveying 
or securing title covering readily marketable 
nonperishable staples, including live stock, when 
the actual market value of the property securing 
the obligation is not at any time less than 
115 per centum of the face amount of the 
notes secured by such documents and when 
such property is fully covered by insurance, and 
(4) the discount of any note or notes secured by 



Bank Acceptances 65 

not less than a like face amount of bonds or notes Notes 
of the United States issued since April 24, 1917, Ed 7 
or certificates of indebtedness of the United States, s *» tes war 
shall not be considered as money borrowed withm 
the meaning of this section. The total liabilities to 
any association, of any person or of any corpora- 
tion, or firm, or company, or the several members 
thereof upon any note or notes purchased or dis- 
counted by such association and secured by bonds, 
notes, or certificates of indebtedness as described in 
(4) hereof shall not exceed (except to the extent 
permitted by rules and regulations prescribed by 
the Comptroller of the Currency, with the approval 
of the Secretary of the Treasury) ten per centum 
of such capital stock and surplus fund of such asso- 
ciation and the total liabilities to any association 
of any person or of any corporation, or firm, or 
company, or the several members thereof for money 
borrowed, including the liabilities upon notes se- 
cured in the manner described under (3) hereof, ex- 
cept transactions (1 ) , (2) , and (4) , shall not at any Limitation on 
time exceed twenty-five per centum of the amount , d °^ entary 
of the association's paid-in and unimpaired capital 
stock and surplus. The exception made under (3) 
hereof shall not apply to the notes of any one per- 
son, corporation or firm or company, or the several 
members thereof for more than six months in any 
consecutive twelve months. 

(National Bank Act, Section 5200, Revised Statutes, as 
amended October 22, 1919.) 



Opinions and Rulings 

Purchase or Discount of Acceptances of Other Banks. .,_.„ 

'Bills of 

"Bills of exchange" may be taken as including bank acceptances 



66 



Com 



rcial Banking Practice 



Bills discounted 
before acceptance 



acceptances, since a bill does not lose its character- 
istics as such when accepted by the drawee. 

(Opinion of Counsel, Federal Reserve Bulletin, March, 
1917, page 195.) 

A bill of exchange discounted before acceptance 
may be said to be drawn against actually existing 
value only when it is accompanied by shipping 
documents, warehouse receipts, or other papers se- 
curing title to the goods sold. 

(Opinion of Counsel, Federal Reserve Bulletin, March, 
1917, page 195.) 



Secured by shipping 
documents or 
pledge of goods 



Discount of 
acceptances 
as business 
paper 



A bill secured by shipping documents, or by the 
pledge of goods actually sold, might be discounted 
by a member bank before acceptance without being 
subject to the limitations imposed by section 5200, 
since this would constitute a bill drawn in good 
faith against actually existing value. 

(Opinion of Counsel, Federal Reserve Bulletin, December, 
1916, page 683.) 

The Board finds it necessary to adhere to its 
established policy of not making any general ruling 
on the question of how much a bank may invest in 
any particular security. It holds, however, that if 
a firm is a bona fide owner for value of the accept- 
ances of any particular institution and such accept- 
ances are sold to or discounted with a member bank, 
the acceptances could no doubt be treated as com- 
mercial or business paper actually owned by the 
party negotiating them and would therefore be 
excepted from the limitation of section 5200, Re- 
vised Statutes. 

(Ruling, Federal Reserve Bulletin, December, 1916, page 
678.) 



Bank Acceptances 67 

A bill rediscounted in good faith by a member Rediscounted 
bank, which is no longer owned or held by the bank, Ktedby 
need not be included as a liability of the maker to seclion5200 
the bank within the meaning of section 5200, Re- 
vised Statutes. Bills rediscounted under an agree- 
ment to repurchase, or which are merely credited 
to the account of the bank offering them for redis- 
count, are subject to the limitations of section 5200. 

(Opinion of Counsel, Federal Reserve Bulletin, Septem- 
ber, 1918, page 867.) 

It appears that some national banks, in consid- indorsement 
eration of a fee or commission, are accustomed to daion """ " 
indorse acceptances for the accommodation of their 
customers or bill brokers. Whether or not a na- 
tional bank has authority to indorse an acceptance 
for accommodation is a question of law which in the 
last analysis must be determined by the courts. The 
Federal Reserve Board is of the opinion that a na- 
tional bank has no authority to indorse an accept- 
ance for accommodation, and that such act is ultra 
vires. 

However, a national bank may purchase an ac- 
ceptance and immediately resell it with its indorse- 
ment, since the power to indorse acceptances is in- 
cidental to the power to negotiate acceptances. 
There appears to be no authority of law which per- 
mits a national bank to lend its credit by indorsing 
an acceptance where the transaction does not in- 
volve an actual transfer of title to and from the 
national bank. 

(Opinion of Counsel, Federal Reserve Bulletin, May, 1921, 
page 547.) 

Purchase by National Bank of its own Acceptances. 

A member bank may legally purchase its own Ban k ma y 

j o j xr # purchase its 

acceptances, but such a transaction is equivalent to own acceptances 



68 



Commercial Banking Practice 



Exemption from 
limitations of 
13 



Reissuance of 
acceptances 



Rediscount of 
such acceptances 



a loan or advance to the customer for whom the 
acceptance was made and the liability of such cus- 
tomer becames subject to the limitations of section 
5200, Revised Statutes. 

(Opinion of Counsel, Federal Reserve Bulletin, Decem- 
ber, 1916, page 680.) 

When a bank purchases its own acceptance be- 
fore maturity such acceptance need not be included 
in the aggregate of acceptances authorized by sec- 
tion 13. 

(Opinion of Counsel, Federal Reserve Bulletin, August, 
1916, page 397.) 

While the Board has ruled that when a bank buys 
its own acceptances they are to be recorded as loans 
subject to the limitations of section 5200, the right 
of the bank to resell or reissue the acceptance is, in 
the opinion of counsel, fully recognized by the au- 
thorities, and where this is done they may be treated 
as acceptances outstanding and not as loans. 

(Opinion of Counsel, Federal Reserve Bulletin, Septem- 
ber, 1917, page 691.) 

An acceptance which has been purchased by the 
accepting bank and subsequently rediscounted with 
its Federal reserve bank is not subject to the lim- 
itations of section 5200 of the Revised Statutes. 

(Opinion of Counsel, Federal Reserve Bulletin, Septem- 
ber, 1917, page 696.) 



PART II. 



Rediscounts with Federal 
Reserve Banks 

General Statutory Provisions 

Upon the indorsement of any of its member Notes, drafts, and 
banks, which shall be deemed a waiver of demand, bll,s of exchan s e 
notice and protest by such bank as to its own in- 
dorsement exclusively, any Federal reserve bank 
may discount notes, drafts, and bills of exchange 
arising out of actual commercial transactions; that Commercial paper 
is, notes, drafts, and bills of exchange issued or 
drawn for agricultural, industrial, or commercial 
purposes, or the proceeds of which have been used, 
or are to be used, for such purposes, the Federal 
Reserve Board to have the right to determine or 
define the character of the paper thus eligible for 
discount, within the meaning of this Act. Nothing 
in this Act contained shall be construed to prohibit 
such notes, drafts, and bills of exchange, secured by Agricu1 ^ and 
staple agricultural products, or other goods, wares, 
or merchandise, from being eligible for such dis- 
count ; but such definition shall not include notes, 
drafts, or bills covering merely investments or is- 
sued or drawn for the purpose of carrying or trad- 
ing in stocks, bonds, or other investment securities, 
except bonds and notes of the Government of the 
United States. Notes, drafts, and bills admitted JJ^l! 

' ' m eligible paper 

to discount under the terms of this paragraph must 
have a maturity at the time of discount of not more 



70 



Commercial Banking Practice 



Amount rediscount- 
able by one bank 
bearing signature 
of any one interest 



Bank acceptances 
eligible for 
rediscount 



than ninety days, exclusive of days of grace: Pro- 
vided,, That notes, drafts, and bills drawn or issued 
for agricultural purposes or based on live stock 
and having a maturity not exceeding six months, 
exclusive of days of grace, may be discounted in an 
amount to be limited to a percentage of the assets 
of the Federal reserve bank, to be ascertained and 
fixed by the Federal Reserve Board. 

The aggregate of such notes, drafts, and bills 
bearing the signature or indorsement of any one 
borrower, whether a person, company, firm, or cor- 
poration, rediscounted for any one bank, shall at no 
time exceed ten per centum of the unimpaired capi- 
tal and surplus of said bank; but this restriction 
shall not apply to the discount of bills of exchange 
drawn in good faith against actually existing 
values. 

Any Federal reserve bank may discount accept- 
ances of the kinds hereinafter described,* which 
have a maturity at the time of discount of not more 
than three months' sight, exclusive of days of grace, 
and which are indorsed by at least one member 
bank. 



Subject to reg- 
ulations of 
Federal Reserve 
Board 



The discount and rediscount and the purchase 
and sale by any Federal reserve bank of any bills 
receivable and of domestic and foreign bills of ex- 
change, and of acceptances authorized by this Act, 
shall be subject to such restrictions, limitations, and 
regulations as may be imposed by the Federal Re- 
serve Board. 



Such drafts or bills [to provide dollar exchange] 



* See Part I, "General Statutory Provisions," pages 9-10, 
above. 



Rediscounts 71 

may be acquired by Federal reserve banks in 
such amounts and subject to such regulations, 
restrictions, and limitations as may be prescribed 
by the Federal Reserve Board. 

(Federal Reserve Act, Section 13.) 

No Federal reserve bank shall be permitted to Rediscounts 
discount for any [member] State bank or trust jJJJJjJj 
company notes, drafts, or bills of exchange of any 
one borrower who is liable for borrowed money to 
such State bank or trust company in an amount 
greater than ten per centum of the capital and sur- 
plus of such State bank or trust company, but the 
discount of bills of exchange drawn against actually 
existing value and the discount of commercial or 
business paper actually owned by the person nego- 
tiating the same shall not be considered as borrowed 
money within the meaning of this section. The Conditions 
Federal reserve bank, as a condition of the discount 
of notes, drafts, and bills of exchange for such State 
bank or trust company, shall require a certificate 
or guaranty to the effect that the borrower is not 
liable to such bank in excess of the amount provided 
by this section, and will not be permitted to become 
liable in excess of this amount while such notes, 
drafts, or bills of exchange are under discount with 
the Federal reserve bank. 

(Federal Reserve Act, Section 9.) 

Upon the affirmative vote of not less than five of Rediscounts 
its members, the Federal Reserve Board shall have until October 
power to permit Federal reserve banks to discount 3I ' 1921 
for any member bank notes, drafts, or bills of ex- 
change bearing the signature or endorsement of any 
one borrower in excess of the amount permitted by 
section 9 and section 13 of this Act, but in no case 
to exceed twenty per centum of the member bank's 



72 



Commercial Banking Practice 



Security of 
War Finance 
Corporation 
bonds 



Procuring dis- 
counts for 

nonmembers 



Aggregate 
accommodations 



capital and surplus: Provided, however, That all 
such notes, drafts, or bills of exchange discounted 
for any member bank in excess of the amount per- 
mitted under such sections shall be secured by not 
less than a like face amount of bonds or notes of the 
United States issued since April 24 9 1917, for which 
the borrower shall in good faith prior to January 1, 
1921, have paid or agreed to pay not less than the 
full face amount thereof, or certificates of indebted- 
ness of the United States: Provided further, That 
the provisions of this subsection (m) shall not be 
operative after October 31, 1921. 

(Federal Reserve Act, Section 11 (m).) 

The Federal reserve banks shall be authorized, 
subject to the maturity limitations of the Federal 
Reserve Act and to regulations of the Federal Re- 
serve Board, ... to rediscount eligible paper se- 
cured by . . . bonds [of the War Finance Cor- 
poration] and indorsed by a member bank. No 
discount or rediscount under this section shall be 
granted at a less interest charge than one per 
centum per annum above the prevailing rates for 
eligible commercial paper of corresponding ma- 
turity. 

(War Finance Corporation Act, Section 13.) 

No member bank shall act as the medium or 
agent of a nonmember bank in applying for or re- 
ceiving discounts from a Federal reserve bank un- 
der the provisions of this Act, except by permis- 
sion of the Federal Reserve Board. 

(Federal Reserve Act, Section 19.) 

Said board [of directors of each Federal reserve 
bank] shall administer the affairs of said bank 
fairly and impartially and without discrimination 
in favor of or against any member bank or banks 



Rediscounts 73 

and shall, subject to the provisions of law and the 
orders of the Federal Reserve Board, extend to 
each member bank such discounts, advancements 
and accommodations as may be safely and reason- 
ably made with due regard for the claims and de- 
mands of other member banks. 

(Federal Reserve Act, Section 4.) 

General Regulations of Federal 
Reserve Board 

SUMMARY OF STATUTORY PROVISIONS 

Any Federal reserve bank may discount for any 
of its member banks any note, draft, or bill of ex- 
change, provided — 

(a) It has a maturity at the time of discount Maturity 
of not more than ninety days, exclusive of days of 
grace ; but if drawn or issued for agricultural pur- 
poses or based on live stock, it may have a maturity 

at the time of discount of not more than six months, 
exclusive of days of grace. 

(b) It arose out of actual commercial transac- Commercial 
tions ; that is, it must be a note, draft, or bill of ex- c arader 
change which has been issued or drawn for agricul- 
tural, industrial, or commercial purposes, or the pro- 
ceeds of which have been used or are to be used 

for such purposes. 

(c) It was not issued for carrying or trading in Finance paper 
stocks, bonds, or other investment securities, except 
bonds and notes of the Government of the United 
States. 

(d) The aggregate of notes, drafts, and bills Ten per cent 
bearing the signature or indorsement of any one 
borrower, whether a person, company, firm, or cor- 
poration, rediscounted for any one member bank, 
whether State or National, shall at no time exceed 



74 



Commercial Banking Practice 



Indorsement 



Rediscounts 
for member 
State banks 



ten per cent.* of the unimpaired capital and surplus 
of such bank ; but this restriction shall not apply to 
the discount of bills of exchange drawn in good 
faith against actually existing values. 

(e) It is indorsed by a member bank. 

(f) It conforms to all applicable provisions of 
this regulation. 

No Federal reserve bank may discount for any 
member State bank or trust company any of the 
notes, drafts, or bills of any one borrower who is 
liable for borrowed money to such State bank or 
trust company in an amount greater than ten per 
cent.f of the capital and surplus of that State 

* Under the terms of Section 1 1 (m) as amended by the 
Act of February 27, 1921, a Federal reserve bank may, until 
October 31, 1921, rediscount for any member bank, whether 
State or National, notes, drafts, and bills bearing the signa- 
ture or indorsement of any one borrower in an amount not 
to exceed twenty per cent, of the member bank's capital and 
surplus, provided that the excess over and above ten per cent, 
be secured by not less than a like face amount of bonds or 
notes of the United States issued since April 24, 1917, for 
which the borrower shall in good faith prior to January 1, 
1921, have paid, or agreed to pay, not less than the full face 
amount thereof, or certificates of indebtedness of the United 
States. (As amended in effect by Act of February 27, 1921.) 

tUnder the terms of Section 11 (m) as amended by 
the Act of February 27, 1921, a Federal reserve bank may, 
until October 31, 1921, rediscount for a member State bank 
or trust company paper of any one borrower secured by not less 
than a like face amount of bonds or notes of the United States 
issued since April 24, 1917, for which the borrower shall in good 
faith prior to January 1, 1921, have paid, or agreed to pay, 
not less than the full face amount thereof, or certificates of 
indebtedness of the United States, even though such State 
bank or trust company may already have loaned to the bor- 
rower under his regular line of credit in excess of the ten 
per cent, limit defined above. If, however, the member State 
bank or trust company has loaned to one borrower in excess 
of that ten per cent, limit under his regular line of credit, the 
Federal reserve bank cannot rediscount for that State bank 
or trust companjr any of the paper of that borrower taken 



Rediscounts 7C 

bank or trust company, but in determining the 
amount of money borrowed from such State bank 
or trust company the discount of bills of exchange 
drawn in good faith against actually existing value 
and the discount of commercial or business paper 
actually owned by the person negotiating the same 
shall not be included. 

(Regulation A, Series of 1920, A, I.) 

ELIGIBILITY OF NOTES, DRAFTS, AND BILLS 
OF EXCHANGE 

The Federal Reserve Board, exercising its statu- 
tory right to define the character of a note, draft, 
or bill of exchange eligible for rediscount at a Fed- 
eral reserve bank, has determined that — 

(a) It must be a note, draft, or bill of exchange commercial 
which has been issued or drawn, or the proceeds of paper 
which have been used or are to be used in the first 
instance, in producing, purchasing, carrying, or 
marketing goods* in one or more of the steps of 

the process of production, manufacture, or distri- 
bution, or for the purpose of carrying or trading in 
bonds or notes of the United States. 

(b) It must not be a note, draft, or bill of ex- Finance paper 
change the proceeds of which have been used or are Ine,I s ib,e 
to be used for permanent or fixed investments of 

any kind, such as land, buildings, or machinery, or 
for any other capital purpose. 

under that regular line of credit, but may rediscount any 
paper so secured by Government obligations of the kinds 
specified, acquired under the conditions set forth above, up to 
an amount not in excess of twenty per cent, of the capital and 
surplus of such State bank or trust company. (As amended 
in effect by Act of February 27, 1921.) 

* When used in this regulation the word "goods" shall be 
construed to include goods, wares, merchandise, or agricul- 
tural products, including live stock. 



76 



Commercial Banking Practice 



Collateral 
security 



Certificate 
of member 
bank 



Member 

State 

bank 



(c) It must not be a note, draft, or bill of ex- 
change the proceeds of which have been used or are 
to be used for investments of a purely speculative 
character or for the purpose of lending to some 
other borrower. 

(d) It may be secured by the pledge of goods 
or collateral of any nature, including paper, which 
is ineligible for rediscount, provided it (the note, 
draft, or bill of exchange) is otherwise eligible. 

(Regulation A, Series of 1920,, A, II.) 

APPLICATIONS FOR REDISCOUNT 

All applications for the rediscount of notes, 
drafts, or bills of exchange must contain a certifi- 
cate of the member bank, in form to be prescribed 
by the Federal reserve bank, that, to the best of its 
knowledge and belief, such notes, drafts, or bills of 
exchange have been issued for one or more of the 
purposes . . . [of producing, purchasing, car- 
rying or marketing goods, or of carrying or trading 
in United States obligations], and, in the case of a 
member State bank or trust company, all applica- 
tions must contain a certificate or guaranty to the 
effect that the borrower is not liable, and will not be 
permitted to become liable during the time his paper 
is held by the Federal reserve bank, to such bank 
or trust company for borrowed money in an amount 
greater than . . . [ten per cent, of the capital 
and surplus of such bank or trust company] . 

(Regulation A, Series of 1920, A, III.) 



Commercial 
paper 



Rediscount of Promissory Notes 
DEFINITION OF NOTE 

A promissory note, within the meaning of this 
regulation, is defined as an unconditional promise, 
in writing, signed by the maker, to pay, in the 
United States, at a fixed or determinable future 
time, a sum certain in dollars to order or to bearer. 

(Regulation A, Series of 1920, A, IV.) 

ELIGIBLE CLASSES OF NOTES 
Statutory Provisions 

Upon the indorsement of any of its member 
banks, which shall be deemed a waiver of demand, 
notice and protest by such bank as to its own in- 
dorsement exclusively, any Federal reserve bank 
may discount notes, drafts, and bills of exchange 
arising out of actual commercial transactions; 
that is, notes, drafts, and bills of exchange issued . 
or drawn for agricultural, industrial, or commer- and commodity 
cial purposes, or the proceeds of which have been paper 
used, or are to be used, for such purposes, the 
Federal Reserve Board to have the right to deter- 
mine or define the character of the paper thus eligi- 
ble for discount, within the meaning of this Act. 
Nothing in this Act contained shall be construed to p ape r based on 
prohibit such notes, drafts, and bills of exchange, JHjJJJf 8- 
secured by staple agricultural products, or other 
goods, wares, or merchandise, from being eligible 
for such discount; [or] . . . notes, drafts, or 
bills . . . issued or drawn for the purpose of 
carrying or trading in . . . bonds and notes of 
the Government of the United States. 

(Federal Reserve Act, Section 13.) 



78 



Commercial Banking Practice 



Paper secured 
by bonds of 
War Finance 
Corporation 



Commercial 
paper 



Collateral 
notes 



Classes of 
eligible paper 



The Federal reserve banks shall be authorized 
. . . to rediscount eligible paper secured by 
. . . bonds [of the War Finance Corporation] 
and indorsed by a member bank. No discount or 
rediscount under this section shall be granted at a 
less interest charge than one per centum per annum 
above the prevailing rates for eligible commercial 
paper of corresponding maturity. 

(War Finance Corporation Act, Section 18.) 

Regulations of Federal Reserve Board 

The Federal Reserve Board, exercising its statu- 
tory right to define the character of a note, draft, 
or bill of exchange eligible for rediscount at a Fed- 
eral reserve bank, has determined that — 

It must be a note, draft, or bill of exchange 
which has been issued or drawn, or the proceeds of 
which have been used or are to be used in the first 
instance, in producing, purchasing, carrying, or 
marketing goods* in one or more of the steps of the 
process of production, manufacture, or distribution, 
or for the purpose of carrying or trading in bonds 
or notes of the United States. 

It may be secured by the pledge of goods or col- 
lateral of any nature, including paper, which is 
ineligible for rediscount, provided it (the note, 
draft, or bill of exchange) is otherwise eligible. 

(Regulation A, Series of 1920, A, II.) 

Opinions and Rulings 
There are two general classes of eligible agricul- 
tural and commercial paper — (1) paper which is 
eligible because issued or drawn for an agricultural 



* When used in this regulation the word "goods" shall be 
construed to include goods, wares, merchandise, or agricul- 
tural products, including live stock. 



Rediscounts 79 

or commercial purpose, and (2) paper which is eli- 
gible because the proceeds have been or are to be 
used for an agricultural or commercial purpose. 

A note of a buyer given to the seller in payment Commercial 
for articles purchased is a note which has been purpose 
issued or drawn for a commercial purpose. If a 
note is not issued or drawn for such a purpose, its 
eligibility or ineligibility for rediscount must be de- Useofpro- 
termined by the purpose for which the proceeds ceeds 
have been or are to be used. The use of proceeds to 
purchase goods for resale is a commercial purpose, 
even though the articles must be considered perma- 
nent investments in the hands of those who ulti- 
mately purchase them. 

The purchase and sale of any articles or com- Commercial 
modities including agricultural products is a com- paper 8 ™ a 
mercial rather than an agricultural transaction, distinguished 
Consequently, the note of a dealer, whether it is 
given in payment for articles or commodities pur- 
chased for resale, or is discounted by the dealer at 
his bank to provide funds with which to purchase 
such articles or commodities, can be eligible for 
rediscount only as commercial paper. So also a 
note given to a farmer in payment for agricultural 
products grown by him cannot be eligible for redis- 
count as agricultural paper but may be eligible as 
commercial paper. 

Whether the buyer makes his own note or accepts Rules appli- 
a draft drawn on him by a seller, the same prin- drafts* 
ciples will apply in determining whether the instru- 
ment representing the buyer's obligation is com- 
mercial paper or agricultural paper. 

Even though a bill or note may technically be No obligation 
eligible for rediscount, a Federal reserve bank is 



80 



Commercial Banking Practice 



Loans to 
individuals 



Discretion of 
reserve banks 



Test of 

eligibility 



Paper of 

waterworks 

company 



under no obligation to rediscount it but may exer- 
cise its discretionary power. 

(Ruling, Federal Reserve Bulletin, December, 1920, page 
1301; October, 1921, page 1199.) 

Federal reserve banks do not make loans directly 
to individuals, but rediscount the paper of member 
banks, which include all national banks and such 
State banks as may have joined the Federal Re- 
serve System. 

(Ruling, Federal Reserve Bulletin, June, 1916, page 272.) 

Even though a note may be technically eligible 
for rediscount, a Federal reserve bank may in its 
discretion decline to effect its rediscount, if for any 
reason it is deemed to be an undesirable investment, 
and should do so in any case where the ultimate 
payment of the note is dependent upon the success 
of the transaction giving rise to the note. 

(Ruling, Federal Reserve Bulletin, July, 1920, page 699.) 

The test of the eligibility of paper is whether it 
complies with the terms of the Federal Reserve Act 
and the Board's regulations, and this in turn in- 
volves the question of the use of the proceeds. In 
the last analysis this is a question of fact and its 
determination is the function of the reserve banks 
rather than of the Federal Reserve Board. 

(Ruling, Federal Reserve Bulletin, November, 1920, page 
1176.) 

The ninety-day paper of a waterworks company, 
the proceeds of which have been or are to be used to 
provide funds for payroll, purchases of coal, etc., 
is eligible for rediscount by a Federal reserve bank 
if the paper is otherwise in conformity with the law 
and the provisions of the Board's regulations. 

(Ruling, Federal Reserve Bulletin, July, 1917, page 527.) 



Rediscounts 81 



Water actually sold and delivered by an irriga- Paper of 
tion company to farmers who have contracted with ^J^y 
the company for its delivery may be considered 
"goods sold," or in other words, the sale of water in 
this manner is a commercial transaction. Conse- 
quently, the note of the irrigation company, the 
proceeds of which have been or are to be used for 
payroll or other current purposes in connection 
with the distribution of the water to the farmers, is 
eligible for rediscount. 

(Ruling, Federal Reserve Bulletin, September, 1920, page 
949.) 

If the note of an owner or producer is given in Notes for 
good faith to a contractor in actual payment of ma- malenal 
terials and services furnished by him for the owner 
or producer, it may be considered technically eligi- 
ble for rediscount as paper, the proceeds of which 
have been or are to be used for a commercial or in- 
dustrial purpose. The paper in the hands of the 
contractor is commercial or business paper actually 
owned by him. 

(Ruling, Federal Reserve Bulletin, July, 1920, page 699.) 

It is impossible to make any general ruling that Cotton 
cotton factors' paper, as such, is eligible or ineligible ™j£r* 
for rediscount. On the one hand, paper the pro- 
ceeds of which are used to lend to some third party 
is finance paper rather than commercial paper and 
is in consequence ineligible for rediscount even 
though that third party may use the proceeds for a 
commercial purpose. On the other hand, any paper 
the proceeds of which are used to purchase goods to 
sell to some third party is eligible for rediscount as 
commercial paper. E 

Whether or not a given transaction falls within 
one class or the other is solely a question of fact 



82 



Commercial Banking Practice 



Notes owned 
by cotton 
factors 



Notes for 

trucks 

purchased 



Discount of 
renewal notes 



for the determination of the directors of the Fed- 
eral reserve bank to which the paper is presented 
for rediscount. The mere fact that a borrower on a 
given note is a cotton factor does not of itself render 
that note ineligible since its eligibility is a matter to 
be determined by the use to which the proceeds of 
that particular note are put. 

(Ruling, Federal Reserve Bulletin, November, 1919, page 
1054.) 

If a cotton factor's loans to customers are evi- 
denced by the customers' notes, these notes could be 
indorsed and discounted by the factor and might 
then be eligible for rediscount upon satisfactory 
evidence that the proceeds of the loans have been 
or are to be used for agricultural or commercial 
purposes. Moreover, when a factor sells cotton on 
credit terms which are customary and which are 
not unnecessarily or unreasonably long, a note or 
accepted draft for the amount of the purchaser's 
obligation will have been issued or drawn for a com- 
mercial purpose and may be eligible for rediscount. 

(Ruling, Federal Reserve Bulletin, November, 1920, page 
1176.) 

A note given by a corporation furnishing motor 
transportation to the seller in payment for motor 
trucks purchased is commercial paper in the hands 
of the seller and may therefore be eligible for redis- 
count after it has been discounted by the seller. 

(Ruling, Federal Reserve Bulletin, February, 1921, page 
191.) 

Renewals differ, and banking judgment deter- 
mines the merits of each particular case. Self- 
liquidating paper, even though the transaction 
which gives rise to it does not liquidate itself within 
the ninety-day maturity, might be discounted even 



Rediscounts 83 

though it appears to be renewal paper. Banks 
should not enter into an agreement for a renewal. 
Care should be exercised in examining such paper 
and the transactions which give rise to it, but 
mechanical rules should not be allowed to take the 
place of discriminating banking judgment. 

(Buling, Federal Reserve Bulletin, June, 1915, page 74.) 

Paper of equity exchanges, if first discounted by Pa P. er oi 
a member bank, would be in form eligible for redis- change*" 
count at the Federal reserve bank, provided its 
maturity at the time of discount does not exceed 
ninety days. Their paper must, however, first have 
been discounted with a member bank and the mem- 
ber bank alone would have the right to rediscount 
this paper with the Federal reserve bank. 

(Ruling, Federal Reserve Bulletin, May, 1917, page 379.) 

The notes of customers of a cold storage com- Notes 
pany representing loans made to them by the bycoid 
company might be eligible for rediscount if the slora s e 
customers have used or are to use the proceeds for 
agricultural or commercial purposes. 

(Ruling, Federal Reserve Bulletin, March, 1921, page 309.) 

Secured Notes. 

Section 13 provides in part that "nothing in this Effect of 
Act contained shall be construed to prohibit such securlty 
notes, drafts, and bills of exchange, secured by 
staple agricultural products, or other goods, wares, 
or merchandise from being eligible for such dis- 
count." This provision is merely a declaration that 
paper which is eligible for rediscount by reason of 
the use of the proceeds is not made ineligible by 
reason of being secured. The provision cannot be 
construed to make eligible for rediscount paper 
which is secured in the manner specified but which 



84 



Commercial Banking Practice 



is not eligible commercial or agricultural paper as 
defined in the preceding part of the section. 

(Ruling, Federal Reserve Bulletin, November, 1920, page 
1177.) 



Eligibility tested by 
use of funds 



Under section 13 of the Federal Reserve Act the 
eligibility of a note for rediscount is determined by 
the use of the funds derived from the original nego- 
tiation of the note. The collateral security of the 
note may indicate its use, but the form of collateral 
is otherwise immaterial. In other words, a note 
might be secured by railroad stocks and bonds, but 
the proceeds might be used for an agricultural, 
industrial, or a commercial purpose, in which event 
the note would be eligible for rediscount, although 
it would not be if the proceeds were used to pur- 
chase or carry the railroad stocks and bonds. 

(Opinion of Counsel, Federal Reserve Bulletin, December, 
1917, page 954.) 



Collateral notes for 
commercial purposes 



Notes secured by collateral, the proceeds of 
which have been used or are to be used for commer- 
cial purposes, and which otherwise comply with the 
regulations, are eligible for rediscount. 

The fact that commercial paper has the addi- 
tional security of collateral in no way affects its 
eligibility for rediscount. 

(Ruling, Federal Reserve Bulletin, September, 1915, page 
268.) 



Eligible security not 
sufficient 



A note, even though secured by eligible paper, is 

not itself eligible for rediscount unless issued for an 

agricultural, commercial, or industrial purpose. 

(Ruling, Federal Reserve Bulletin, September, 1917, page 
690.) 



Rediscounts 85 

The note of a manufacturer secured by his bills Collateral of bills 
receivable is desirable paper, and should certainly 
not be debarred as a collateral trust note. 

(Ruling, Federal Reserve Bulletin, July, 1915, page 127.) 

A note, draft, or bill of exchange drawn for com- Collateral of 
mercial purposes and otherwise eligible for redis- mort 2 a g e8 
count under the provisions of section 13 of the 
Federal Reserve Act is not rendered ineligible 
merely because it is secured by a mortgage on real 
estate. 

(Opinion of Counsel, Federal Reserve Bulletin, June, 1917, 
page 458.) 

Paper secured by staple perishable food products Notes 
such as butter, cheese, eggs, poultry, frozen fish, by food 
etc., carried for seasonable periods in cold storage P roducU 
on negotiable warehouse receipts, is eligible, if of- 
fered with the indorsement of a member bank at the 
usual rate for ninety-day commercial paper. 

(Ruling, Federal Reserve Bulletin, January, 1918, page 30.) 

A member bank making loans against warehouse Potatoes 
receipts for potatoes properly insured could redis- "curity 
count such paper with its Federal reserve bank for 
periods not longer than ninety days. 

(Ruling, Federal Reserve Bulletin, August, 1917, page 614.) 

The note of a furnace company secured by pig Pig iron 
iron manufactured by the company on contract for 8ecurity 
delivery is eligible for rediscount. While this prin- 
ciple generally holds good, each case should be care- 
fully scrutinized that the collateral may be readily 
marketable goods. 

(Ruling, Federal Reserve Bulletin, July, 1915, page 127.) 

The Board upholds a Federal reserve bank in 
declining to give assurance to the receiver of an 



Rediscount 
for insol* 



when 



insolvent member bank that the Federal reserve reopened 



86 



Commercial Banking Practice 



Conditions of 
eligibility 



Maturity in relation 
to eligibility 



bank will upon the reopening of the insolvent bank 
rediscount eligible paper freely, without requiring 
the indorsement of directors or other additional 
security. Offerings should be considered upon their 
merits. 

(Ruling, Federal Reserve Bulletin, February, 1916, page 
66.) 

Notes Based on United States Obligations. 

Any member bank which has loaned money to 
any of its customers for the purpose of carrying or 
trading in bonds or notes of the United States may 
rediscount with its Federal reserve bank the bill 
or note of its customer, provided such bill or note 

(a) Has a maturity at the time of discount of 
not more than ninety days, exclusive of days 
of grace; and 

(b) Has the indorsement of the member bank. 
Such bill or note, however, need not necessarily 

be secured and need not be drawn for a commercial 
purpose other than for the purpose of carrying or 
trading in notes or bonds of the United States. 

(Ruling, Federal Reserve Bulletin, March, 1917, page 158.) 

A member bank acting through another member 
bank may obtain the discount of its paper secured 
by Government bonds for a period as long as ninety 
days, although a member bank acting alone may 
not tender its collateral note to the Federal reserve 
bank, which runs for more than fifteen days. 

It may be proper in this connection to consider 
questions of fact ; but in case a country bank which 
has regular dealings with a large bank in a city 
sends its note secured by Government bonds to that 
bank, the Board would regard the note as eligible 
for rediscount by the city bank. 

(Ruling, Federal Reserve Bulletin, September, 1918, page 
863.) 



Rediscounts 87 

If the proceeds of a note have been used or are to Notes of non _ 
be used to carry or trade in United States obliga- member banks 
tions, the note, if acquired in good faith, should be 
eligible for rediscount with the indorsement of the 
member bank, whether it is executed by a member 
or by a nonmember bank. 

(Ruling, Federal Reserve Bulletin, August, 1918, page 743.) 

INELIGIBLE CLASSES OF NOTES 
Statutory Provisions 

The Federal Reserve Board .... [shall] have Security 
the right to determine or define the character of the paper 
paper thus eligible for discount, within the meaning 
of this Act .... but such definition shall not 
include notes, drafts, or bills covering merely in- 
vestments or issued or drawn for the purpose of 
carrying or trading in stocks, bonds, or other invest- 
ment securities, except bonds and notes of the Gov- 
ernment of the United States. 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

The paper must not be a note, draft, or bill of Notes for 
exchange the proceeds of which have been used or ? xed . , 

p xr /» -i • investments 

are to be used for permanent or fixed investments 
of any kind, such as land, buildings, or machinery, 
or for any other capital purpose. 

The paper must not be a note, draft, or bill of Speculative 
exchange the proceeds of which have been used or "pe,. 21106 
are to be used for investments of a purely specula- 
tive character or for the purpose of lending to some 
other borrower. 

(Regulation A, Series of 1920, A, II.) 

Opinions and Rulings 
Renewals differ, and banking judgment deter- J^°™ tof 
mines the merits of each particular case. Those notes 



Commercial Banking Practice 



Interested 
maker or 

indorser 



Notes to 
replace 
funds 
withdrawn 



Paper 
secured by 
war savings 
stamps 



Notes of 

land 

banks 



providing working capital or to finance fixed in- 
vestments are not eligible for rediscount. Banks 
should not enter into an agreement for a renewal. 

(Ruling, Federal Reserve Bulletin, June, 1915, page 74.) 
Finance Paper. 

A note is not eligible as commercial paper unless 
made or indorsed by a party to the commercial 
transaction out of which it arises. 

(Federal Reserve Bulletin, September, 1921, page 1079.) 

A note executed by bank "A," and discounted 
by bank "B," the proceeds of which were used to 
replace funds withdrawn by customers to purchase 
Liberty bonds, is not eligible for rediscount by a 
Federal reserve bank, since the proceeds were not 
used for an agricultural, industrial, or commercial 
purpose, or for the purchase of notes or bonds of 
the United States. 

(Opinion of Counsel, Federal Reserve Bulletin, December, 
1917, page 954.) 

Notes, drafts, and bills of exchange which are 
secured by war savings stamps and the proceeds of 
which were used to purchase or carry war savings 
stamps are ineligible for rediscount with a Federal 
reserve bank. 

War savings stamps are in effect receipts for 
payment on account of nonnegotiable evidences of 
indebtedness (war savings certificates), and could 
not be classified as bonds or notes of the United 
States. 

(Opinion of Counsel, Federal Reserve Bulletin, July, 1918, 
page 637.) 

The Federal Reserve Board has heretofore ruled 
that collateral notes of a Federal land bank secured 
by farm loan bonds are not eligible for rediscount 



Rediscounts 89 

by a Federal reserve bank. Joint stock land banks 
are organized for the purpose of engaging in the 
business of lending on farm mortgage securities 
and issuing farm loan bonds. Their business is 
therefore clearly a finance business, and paper is- 
sued by them for the purpose of procuring funds 
to lend for agricultural uses is necessarily finance 
paper and not commercial, industrial, or agricul- 
tural paper within the meaning of section 13 of the 
Federal Reserve Act, even though the ultimate 
borrower may use the proceeds for one of the pur- 
poses specified in the law. 

(Ruling, Federal Reserve Bulletin, June, 1920, page 609.) 

The note of an acceptance house or broker, se- Notes of 
cured by acceptances eligible for rediscount at a hoiBesi" 
Federal reserve bank, is not eligible for rediscount. 

The note of the acceptance house or broker can 
not be said to have been used for an industrial, 
agricultural, or commercial purpose, since the busi- 
ness of such acceptance house or broker is not such 
as to come within any of these classifications. The 
fact that the note is secured by eligible paper is im- 
material if the proceeds are not used for one of the 
purposes named. 

(Ruling, Federal Reserve Bulletin, February, 1918, page 
108.) 



brokers 



The note of a finance or credit company which Notes of 

finance 
companies 



is drawn either directly or indirectly to finance fr 



some industrial or commercial concern in the trans- 
action of its business is not eligible for rediscount, 
even though it may be secured by paper which is 
itself eligible for rediscount. 

(Ruling, Federal Reserve Bulletin, March, 1918, page 197.) 



third 
parties 



factor's 
paper 



90 Commercial Banking Practice 

Collateral The Board holds that collateral trust notes of so- 

l ™** s called finance companies should not be accepted by 

Federal reserve banks for rediscount. Such a 
transaction is not a commercial one. 

(Ruling, Federal Reserve Bulletin, June, 1915, page 72.) 

Loans to The words "in the first instance" were inserted 

in Regulation A, Series of 1920, A, II, for the ex- 
press purpose of making it clear that the making 
of loans to third parties is a finance rather than a 
commercial or agricultural purpose, even though it 
appears that the third parties are to use the funds 
for commercial or agricultural purposes. 

Cotton A note of a cotton factor, the proceeds of which 

are loaned to his customers, is ineligible for redis- 
count even though the loan is merely incidental to 
the main business of the factor. The test of eli- 
gibility is not the character of the business of the 
borrower but the use of the proceeds of the particu- 
lar instrument. 

(Ruling, Federal Reserve Bulletin, November, 1920, page 
1176.) 

Notes Notes of a cold storage company would be in- 

storage eligible if the proceeds are to be used by the corn- 

company pany to make loans to its customers even though 

such notes are secured by the eligible notes of the 

company's customers. 

(Ruling, Federal Reserve Bulletin, March, 1921, page 309.) 

Collateral The note of a manufacturer secured by his bills 

receivable receivable and issued for the purpose of carrying 

collateral for a speculative purpose or collateral in 
the nature of stocks and bonds other than the securi- 
ties of the United States, would not be eligible for 
rediscount. 

(Ruling, Federal Reserve Bulletin, July, 1915, page 127.) 



Rediscounts 91 



Fixed Investments. 

The motor trucks of a corporation furnishing Motor 
motor transportation constitute permanent or fixed trucks 
investments. Consequently, the notes of such a 
corporation issued for the purpose of providing 
funds to purchase motor trucks are ineligible for 
rediscount. 

A note given by such a corporation to the seller 
in payment for motor trucks purchased is commer- 
cial paper in the hands of the seller and may there- 
fore be eligible for rediscount after it has been dis- 
counted by the seller. 

(Ruling, Federal Reserve Bulletin, February, 1921, page 
191.) 

The note of the owner of property which is to be Development 
developed or built upon, the proceeds of which note of P r °P erf y 
have been or are to be used by him to pay for the 
work of developing or building, is generally a note 
"the proceeds of which have been or are to be used 
for permanent or fixed investment" within the 
meaning of the Board's regulation, and therefore 
such a note is not eligible for rediscount. 

(Ruling, Federal Reserve Bulletin, July, 1920, page 699.) 



Nonnegotiable Paper. 

A bill made payable with "collection charges" is Exchange and 
not a negotiable instrument, though the Negotiable charges" 1 
Instruments Law provides that an instrument pay- distin s uished 
able "with exchange" does not lose its negotiability. 

Counsel suggests that the amount of exchange is 
usually ascertainable in advance while collection 
charges are not so ascertainable. 

(Opinion of Counsel, Federal Reserve Bulletin, November, 
1917, page 880.) 



92 



Commercial Banking Practice 



Charges be- 
fore and 
after 
maturity 



While a bill containing a provision for payment 
of the costs of collection and attorney's fees, if it is 
dishonored at maturity, is a valid negotiable instru- 
ment, a bill drawn for a fixed sum "with collection 
charges" is not a negotiable instrument unless it is 
so drawn as to show that no collection charges are 
to be included unless the bill is dishonored at 
maturity. 

(Opinion of Counsel, Federal Reserve Bulletin, August, 
1918, page 745.) 



Assignment 
of open 
accounts 
ineligible 



The assignment of an open account is not nego- 
tiable paper and is not eligible for rediscount by a 
Federal reserve bank under the terms of section 13 
of the Federal Reserve Act. 

(Opinion of Counsel, Federal Reserve Bulletin, May, 1916, 
page 227.) 



Evidence 
of eligi- 
bility 



Statement 
required 



EVIDENCE OF ELIGIBILITY 
Regulations of Federal Reserve Board 

A Federal reserve bank must be satisfied by ref- 
erence to the note or otherwise that it is eligible 
for rediscount. The member bank shall certify in 
its application whether the note offered for redis- 
count has been discounted for a depositor other 
than a bank or for a nondepositor and, if discounted 
for a bank, whether for a member or a nonmember 
bank. The member bank must also certify whether 
a financial statement of the borrower is on file 
with it. 

A recent financial statement of the borrower must 
be on file with the member bank in all cases, except 
with respect to any note discounted by a member 
bank for a depositor other than a bank or another 
member bank if — 



Rediscounts 93 

(1) It is secured by a warehouse, terminal, or Exceptions 
other similar receipt covering goods in storage, or 

by bonds or notes of the United States ; or 

(2) The aggregate of obligations of the bor- 
rower rediscounted and offered for rediscount at 
the Federal reserve bank by the member bank is 
less than a sum equal to ten per cent, of the paid-in 
capital of the member bank and is less than $5,000. 

The Federal reserve bank shall use its discretion 
in taking the steps necessary to satisfy itself as to 
eligibility. Compliance of the note . . . [with the 
requirement that its proceeds must not have been 
used or be used for permanent or fixed investments 
or for any other capital purpose] may be evidenced 
by a statement of the borrower showing a reason- 
able excess of quick assets over current liabilities. 
A Federal reserve bank may, in all cases, require 
the financial statement of the borrower to be filed 
with it. 

(Regulation A, Series of 1920, A, IV.) 

Opinions and Rulings 

Federal reserve banks are authorized to discount Cotton-mffl 
cotton-mill paper indorsed by member banks where paper 
general conditions are satisfactory and statement of 
cotton mill shows that plant is not mortgaged and 
that the deficiency between capital and plant ac- 
count does not amount to more than $5 per spindle. 

(Ruling, Federal Reserve Bulletin, June, 1915, page 73.) 

It is not the present policy of the Federal Re- Ra .^? of 
serve Board to lay down definite tests for deter- assets to 
mining whether paper which is eligible for discount SSL» 
as a matter of law should be considered acceptable 
for rediscount from a credit standpoint. The test 
prescribed in the ruling [published on page 73 of 



Commercial Banking Practice 



Standing 
timber 



Unmined 
minerals 



the Federal Reserve Bulletin for June, 1915] for 
determining the acceptability of paper of the char- 
acter referred to should not therefore be regarded 
as binding on Federal reserve banks. 

A Federal reserve bank may, if it so desires, re- 
discount a note made by a borrower whose state- 
ment fails to show an excess of quick assets over 
current liabilities. Such a statement is not the only 
evidence by which a Federal reserve bank may sat- 
isfy itself that the proceeds of a note have not been 
used and are not to be used for permanent or fixed 
investments. It is a question of policy to be deter- 
mined by the Federal reserve bank in each case 
whether that bank will rediscount a particular note 
offered to it in spite of the fact that the borrower's 
statement fails to show a reasonable excess of quick 
assets over current liabilities. 

(Ruling, Federal Reserve Bulletin, May, 1921, page 546.) 

The Board does not regard it as safe policy for 
Federal reserve banks to treat timber standing 
upon tracts of land as quick assets, similar to man- 
ufactured goods in the hands of the manufacturer 
or jobber. 

(Ruling, Federal Reserve Bulletin, July, 1915, page 126.) 

Unmined minerals are not regarded as quick 
assets. 

(Ruling, Federal Reserve Bulletin, July, 1915, page 126.) 



Commercial 
paper 



MATURITY 
Statutory Provisions 

Notes, drafts, and bills admitted to discount un- 
der the terms of this paragraph must have a matu- 
rity at the time of discount of not more than ninety 
days, exclusive of days of grace: Provided, That 
notes, drafts, and bills drawn or issued for agri- 



Rediscounts 95 

cultural purposes or based on live stock and having Agricultural 
a maturity not exceeding six months, exclusive of J!^* 10011 
days of grace, may be discounted in an amount to 
be limited to a percentage of the assets of the 
Federal reserve bank, to be ascertained and fixed 
by the Federal Reserve Board. 
(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

A bill payable "on or before" a certain date is Notes payable^ 
negotiable paper and, if otherwise in conformity 
with the provisions of law and of the Federal Re- 
serve Act, is eligible for discount by a Federal re- 
serve bank. 

(Ruling, Federal Reserve Bulletin, August, 1916, page 394.) 

A demand note or bill is not eligible under the Demand notes 
provisions of the Act, since it is not in terms pay- 
able within the prescribed ninety days, but may, at 
the option of the holder, not be presented for pay- 
ment until after that time. 

If the bill were altered so as to read "on or be- 
fore days from date, pay to the order of 

ourselves," etc., it would come within the terms of 
the law and would be eligible for rediscount. 

(Ruling, Federal Reserve Bulletin, May, 1917, page 378.) 

A note made payable "on demand, and if no de- Notes payable before 

mand is made, then on ," is eligible for 

rediscount by a Federal reserve bank, provided 
that the date to be filled in is not more than ninety 
days from the date of discount, and provided further 
it conforms to the other provisions of law and the 
regulations of the Board. 

(Ruling, Federal Reserve Bulletin, July, 1917, page 527.) 



90 



Commercial Banking P 



EACTIC 



Alteration 
of maturity 
provision 



A note or draft containing a provision for an ex- 
tension of time should not be approved for general 
use by the Federal Reserve Board. 

(Opinion of Counsel, Federal Reserve Bulletin, September, 
1918, page 870.) 

In the opinion of this office the holder of a note 
which contains a provision for its extension from 
time to time without notice has no right to strike 
out this provision or to effect any alteration in a 
negotiable note after it has been discounted, and to 
do so might have the effect of releasing some of the 
parties to the note. 

(Ruling, Federal Reserve Bulletin, November, 1918, page 
1118.) 



Direct loans 
and 

rediscounts 
distinguished 



A member bank acting through another member 
bank may obtain the discount of its paper secured 
by Government bonds for a period as long as ninety 
days, although a member bank acting alone may 
not tender its collateral note to the Federal reserve 
bank, which runs for more than fifteen days. 

It may be proper in this connection to consider 
questions of fact — whether the transaction is in 
good faith or whether the two banks exchange cour- 
tesies merely for the purpose of having their notes 
discounted for ninety days instead of fifteen days ; 
but in case a country bank which has regular deal- 
ings with a large bank in a city sends its note se- 
cured by Government bonds to that bank, the Board 
would regard the note as eligible for rediscount by 
the city bank. 

(Ruling, Federal Reserve Bulletin, September, 1918, page 
863.) 



Rediscounts 97 

AMOUNT OF PAPER OF ONE INTEREST REDIS- 
COUNTABLE FOR ONE MEMBER BANK 

Statutory Provisions 

The aggregate of such notes, drafts, and bills Ten per cent 
bearing the signature or indorsement of any one Umit 
borrower, whether a person, company, firm, or cor- 
poration, rediscounted for any one bank shall at no 
time exceed ten per centum of the unimpaired capi- Exce P lion 
tal and surplus of said bank; but this restriction 
shall not apply to the discount of bills of exchange 
drawn in good faith against actually existing 
values. 

(Federal Reserve Act, Section 13.) 

No Federal reserve bank shall be permitted to Rediscounb 
discount for any [member] State bank or trust statTbSs 
company notes, drafts, or bills of exchange of any 
one borrower who is liable for borrowed money to 
such State bank or trust company in an amount 
greater than ten per centum of the capital and sur- 
plus of such State bank or trust company, but the 
discount of bills of exchange drawn against actually 
existing value and the discount of commercial or 
business paper actually owned by the person nego- conditions 
tiating the same shall not be considered as borrowed 
money within the meaning of this section. The 
Federal reserve bank, as a condition of the discount 
of notes, drafts, and bills of exchange for such State 
bank or trust company, shall require a certificate 
or guaranty to the effect that the borrower is not 
liable to such bank in excess of the amount provided 
by this section, and will not be permitted to become 
liable in excess of this amount while such notes, 
drafts, or bills of exchange are under discount with 
the Federal reserve bank. 

(Federal Reserve Act, Section 9.) 



Commercial Banking Practice 



Rediscount 
of war paper 
until October 
31, 1921 



Rediscount 
of war paper 
for members 



Upon the affirmative vote of not less than five of 
its members, the Federal Reserve Board shall have 
power to permit Federal reserve banks to discount 
for any member bank notes, drafts, or bills of ex- 
change bearing the signature or endorsement of 
any one borrower in excess of the amount permitted 
by section 9 and section 13 of this Act, but in no 
case to exceed twenty per centum of the member 
bank's capital and surplus: Provided, however, 
That all such notes, drafts, or bills of exchange dis- 
counted for any member bank in excess of the 
amount permitted under such sections shall be se- 
cured by not less than a like face amount of bonds 
or notes of the United States issued since April 24, 
1917, for which the borrower shall in good faith 
prior to January 1, 1921, have paid or agreed to pay 
not less than the full face amount thereof, or certifi- 
cates of indebtedness of the United States: Pro- 
vided, further, That the provisions of this subsec- 
tion (m) shall not be operative after October 
31, 1921. 

(Federal Reserve Act, Section 11 (m).) 

Regulations of Federal Reserve Board 

Under the terms of section 11 (m) as amended 
by the Act of February 27, 1921, a Federal reserve 
bank may, until October 31, 1921, rediscount for 
any member bank, whether State or National, 
notes, drafts, and bills bearing the signature or in- 
dorsement of any one borrower in an amount not to 
exceed twenty per cent, of the member bank's capi- 
tal and surplus, provided that the excess over and 
above ten per cent, be secured by not less than a like 
face amount of bonds or notes of the United States 
issued since April 24, 1917, for which the borrower 
shall in good faith prior to January 1, 1921, have 



Rediscounts 

paid or agreed to pay not less than the full face 
amount thereof, or certificates of indebtedness of 
the United States. 

(Regulation A, Series of 1920, A, I, Note, as amended in 
effect by Act of February 27, 1921.) 

Under the terms of section 11 (m) as amended Rediscount of 
by the Act of February 27, 1921, a Federal reserve Sffiw. 
bank may, until October 31, 1921, rediscount for bank 
a member State bank or trust company paper of 
any one borrower secured by not less than a like 
face amount of bonds or notes of the United States 
issued since April 24, 1917, for which the borrower 
shall in good faith prior to January 1, 1921, have 
paid or agreed to pay not less than the full face 
amount thereof, or certificates of indebtedness of 
the United States, even though such State bank or 
trust company may already have loaned to the bor- 
rower under his regular line of credit in excess of 
the ten per cent, limit defined above. If, however, 
the member State bank or trust company has loaned 
to one borrower in excess of that ten per cent, limit 
under his regular line of credit, the Federal reserve 
bank can not rediscount for that State bank or trust 
company any of the paper of that borrower taken 
under that regular line of credit, but may redis- 
count any paper so secured by Government obliga- 
tions of the kinds specified, acquired under the con- 
ditions set forth above, up to an amount not in 
excess of twenty per cent, of the capital and surplus 
of such State bank or trust company. 

(Regulation A, Series of 1920, A, I, Note, as amended in 
effect by Act of February 27, 1921.) 

Opinions and Rulings 

If any particular paper presented by a member ^Jj^ " 8 
bank to a Federal reserve bank for rediscount, mdorser 



100 



Commercial Banking Practice 



Discretion 
of I 
bank 



Not applicable 
to rediscounting 
bank 



Paper of 

cotton 

broker 



singly or added to the paper of the same makers 
or indorsers which the Federal reserve bank has al- 
ready discounted for said member bank, amounts to 
a total of more than ten per cent, of the unimpaired 
capital and surplus of that bank, the Federal re- 
serve bank has no authority for such rediscount. 

(Ruling, Federal Reserve Bulletin, May, 1916, page 224.) 

A Federal reserve bank may properly decline to 
discount for a member bank the paper of any one 
borrower on the ground that the Federal reserve 
bank has theretofore discounted for other member 
banks what it deems to be a sufficient amount of 
that particular borrower's paper. 

(Ruling, Federal Reserve Bulletin, March, 1920, page 276.) 

In the opinion of the Board the limitations con- 
tained in section 13 of the Federal Reserve Act on 
the rediscount of paper bearing the signature or 
indorsement of any one borrower should not be held 
to refer to the indorsement of a nonmember bank 
on paper rediscounted with a member bank. 

(Ruling, Federal Reserve Bulletin, June, 1918, page 520.) 

A cotton broker who is a depositor of a bank 
finances cotton for various mills by giving to the 
bank his note secured by warehouse receipts of the 
mills indorsed in blank, for cotton stored in his 
name and properly insured, but sold to the mill for 
a specific amount to be paid at a specific time, as 
per sales note attached. The question arises 
whether such loans taken from one broker in excess 
of ten per cent, of the capital and surplus of the 
bank would be an excess loan under the Federal 
Reserve Act, if the financing for each individual 
mill and the accepted sales note held of said mill 
were not in excess of said ten per cent. 



Rediscounts 101 

It is held that the transaction in form is merely 
a discount of single name negotiable paper secured 
by so many bales of cotton. No Federal reserve 
bank could rediscount such notes bearing the name 
of one broker for an aggregate amount in excess 
of ten per cent, of the capital and surplus of the 
member bank. 

(Ruling, Federal Reserve Bulletin, March, 1916, page 113.) 

While a member bank may acquire commercial or Commercial 
business paper from the same person in excess of pa P JJ smess 
ten per cent, of its unimpaired capital and surplus, 
its Federal reserve bank can not rediscount such 
paper bearing the signature or indorsement of the 
same person in excess of that amount. 

Section 13, Federal Reserve Act, does not amend 
section 5200, United States Revised Statutes.* 

(Opinion of Counsel, Federal Reserve Bulletin, June, 1916, 
page 274.) 

A note or bill rediscounted in good faith by a Rediscounted paper 
member bank, which is no longer owned or held by secil<m5200 by 
the bank, need not be included as a liability of the 
maker to the bank within the meaning of section 
5200, Revised Statutes. Notes or bills rediscounted 
under an agreement to repurchase, or which are 
merely credited to the account of the bank offering 
them for rediscount, are subject to the limitations 
of section 5200. 

(Opinion of Counsel, Federal Reserve Bulletin, September, 
1918, page 867.) 

Rediscounts (or Member State Banks. 

The provisions of section 9 of the Federal Re- Total 
serve Act limiting the amount of paper of any one JjJJ 
borrower which may be rediscounted for a State surplus 

*For section 5200 see page 64, above. 



102 



Commercial Banking Practice 



Limitations of 
sections 9 and 
13 distinguished 



Rediscounted 
paper not 
limited 



member bank to ten per cent, of the capital and 
surplus of that bank relate to the total capital and 
surplus of the bank and not merely to the capital 
and surplus assigned under the terms of the State 
law to the commercial department of the bank. 

(Opinion of Counsel, Federal Reserve Bulletin, May, 1920, 
page 495.) 

Under the terms of section 13 no Federal reserve 
bank may properly rediscount for any State mem- 
ber bank the paper of any one borrower in excess 
of ten per cent, of the capital and surplus of that 
member bank. Bills of exchange which are drawn 
against actually existing values are expressly ex- 
cepted from this limitation but commercial or busi- 
ness paper must be included within it. 

Section 9 provides that no Federal reserve bank 
may discount for any State member bank any of 
the paper of any one borrower who is liable to such 
bank for borrowed money in excess of ten per cent, 
of the capital and surplus of the State bank. In deter- 
mining whether a customer is liable to a State bank 
in an amount in excess of ten per cent., neither bills 
of exchange drawn against actually existing values 
nor commercial or business paper actually owned 
by the person negotiating it shall be considered, but 
this provision cannot in any way be construed to 
authorize the Federal reserve bank to rediscount 
for a State member bank in excess of the limits pre- 
scribed by section 13. 

(Opinion of Counsel, Federal Reserve Bulletin, December, 
1919, page 1157.) 

Where a State bank, which is a member of the 
Federal Reserve System, has loaned to one of its 
customers an amount equal to thirty per cent, of its 
capital and surplus, and has rediscounted two- 



Rediscounts 103 

thirds of this amount with a correspondent bank, 
the remaining one-third is eligible for rediscount 
with its Federal reserve bank. 

(Opinion of Counsel, Federal Reserve Bulletin, July, 1918, 
page 638.) 

AGGREGATE AMOUNT REDISCOUNTABLE 

FOR ONE BANK 

Statutory Provisions 

No national banking association shall at any Not limited 
time be indebted, or in any way liable, to an amount bv section 5202 
exceeding the amount of its capital stock at such 
time actually paid in and remaining undiminished 
by losses or otherwise, except on account of . . . 
liabilities incurred under the provisions of the 
Federal Reserve Act. 

(Section 5202, Revised Statutes, as amended.) 

The discount and rediscount and the purchase Subject to 
and sale by any Federal reserve bank of any bills JJ^JjJjy 
receivable and of domestic and foreign bills of ex- Reserve Board 
change, and of acceptances - authorized by this Act, 
shall be subject to such restrictions, limitations, 
and regulations as may be imposed by the Federal 
Reserve Board. 

(Federal Reserve Act, Section 13.) 

Said board [of directors of each Federal reserve Duty of 
bank] shall administer the affairs of said bank FederaI 

.... reserve 

fairly and impartially and without discrimination in bank 
favor of or against any member bank or banks and mdm 
shall, subject to the provisions of law and the orders 
of the Federal Reserve Board, extend to each mem- 
ber bank such discounts, advancements and accom- 
modations as may be safely and reasonably made 
with due regard for the claims and demands of 
other member banks. 

(Federal Reserve Act, Section 4.) 



104 



Commercial Banking Practice 



Not limited 
bylaw 



Opinions and Rulings 

The law places no limitation upon the amount of 
commercial paper which a member bank may re- 
discount with a Federal reserve bank, but leaves 
this to the judgment of the officers of the Federal 
reserve bank. 

(Ruling, Federal Reserve Bulletin, September, 1916, page 
457.) 



INDORSEMENT OF MEMBER BANKS 
Statutory Provisions 

indorsement Upon the indorsement of any of its member 

banks, which shall be deemed a waiver of demand, 
notice and protest by such bank as to its own in- 
dorsement exclusively, any Federal reserve bank 
may discount notes, drafts, and bills of exchange. 

(Federal Reserve Act, Section 13.) 



Opinions and Rulings 

A simple written indorsement will be regarded 
as satisfactory and as coming within the terms of 
the law. 

(Ruling, Federal Reserve Bulletin, October, 1916, page 
524.) 

If a note is otherwise eligible for rediscount, the 
fact that it bears a "without recourse" indorsement 
of a nonmember bank will not affect its eligibility. 

(Opinion of Counsel, Federal Reserve Bulletin, August, 
1918, page 745.) 



Indorsement 
is' 



Without 
recourse 



Procuring rediscounts 
for nonmembers 



REDISCOUNT FOR NONMEMBER BANKS 
Statutory Provisions 

No member bank shall act as the medium or 
agent of a nonmember bank in applying for or re- 
ceiving discounts from a Federal reserve bank un- 



Rediscounts 105 

der the provisions of this Act, except by permission 
of the Federal Reserve Board. 

(Federal Reserve Act, Section 19.) 

Opinions and Rulings 

Assuming that the paper offered by a member Paper 
bank for rediscount is eligible under the regulations nonmember* 1 
prescribed by the Board, it would be necessary in 
each case for the officers of the Federal reserve 
bank to determine whether or not the proceeds of 
such discount are to be used for the purpose of mak- 
ing a loan to a nonmember bank. If the money 
thus borrowed is to be re-lent to a nonmember 
bank, rediscount should not be accepted without 
the permission of the Federal Reserve Board. If, 
on the other hand, a member bank had in good 
faith acquired from a nonmember bank by redis- 
count notes which are eligible under the regulations 
of the Board for rediscount with the Federal re- 
serve bank, and such notes were held as a part of 
the assets of the member bank, there would seem to 
be no objection to the Federal reserve bank's ac- 
cepting such rediscounts, provided the officers are 
satisfied that the transaction is a bona fide trans- 
action and that the member bank did not extend 
accommodation to the nonmember bank with a 
view to rediscounting notes so acquired with the 
Federal reserve bank. 

This is one of the cases which must be left very 
largely to the judgment and discretion of the Fed- 
eral reserve bank officers; and a determination 
must be reached by them on the facts of the case. 

(Ruling, Federal Reserve Bulletin, August, 1915, page 213.) 

The Federal Reserve Board has given general Application 
authority to member banks to apply to their respec- t0 discount 



106 Commercial Banking Practice 

tive Federal reserve banks for discounts of eligible 
paper acquired by such member banks from non- 
member banks, such authority to be effective until 
withdrawn by the Federal Reserve Board. The ex- 
tent to which the respective Federal reserve banks 
will entertain such application is, of course, a matter 
of policy for the determination of the officers of each 
bank. 

(Ruling, Federal Reserve Bulletin, August, 1921, page 963.) 

Paper In the opinion of the Board the limitations con- 

indorsed by tained in section 13 of the Federal Reserve Act on 

the rediscount of paper bearing the signature or in- 
dorsement of any one borrower should not be held 
to refer to the indorsement of a nonmember bank 
on paper rediscounted with a member bank. 

It is true that in such case the nonmember bank 
is contingently liable if the paper is not paid at ma- 
turity, but the Board is inclined to the view that 
this language refers to paper bearing the signature 
or indorsement of borrowers or customers of the 
member bank and not to the indorsement of other 
banks. A nonmember bank could not, of course, 
obtain indirect accommodation from the Federal 
reserve bank through the medium or agency of a 
member bank except with the permission of the 
Federal Reserve Board, but if a member bank had 
acquired eligible paper in due course by rediscount 
from a nonmember bank the member bank should 
hardly be precluded from rediscounting this paper 
with the Federal reserve bank because it bears the 
indorsement of the nonmember bank. 

(Ruling, Federal Reserve Bulletin, June, 1918, page 520.) 



Rediscount of Drafts and Trade 
Acceptances 

DEFINITION OF DRAFT OR BILL OF EXCHANGE 
Regulations of Federal Reserve Board 

A draft or bill of exchange, within the meaning Draft or bUi 
of this regulation, is defined as an unconditional ° 
order in writing, addressed by one person to an- 
other, signed by the person giving it, requiring the 
person to whom it is addressed to pay in the United 
States, at a fixed or determinable future time, a 
sum certain in dollars to the order of a specified 
person. 

(Regulation A, Series of 1920, A, V.) 

Opinions and Rulings 

A note or draft containing a provision for an ex- Extension 
tension of time should not be approved for general ° bme 
use by the Federal Reserve Board. 

(Opinion of Counsel, Federal Reserve Bulletin, September, 
1918, page 870.) 

The drawer and indorser of a bill of exchange Presentment 
made payable on a date specified in the bill are not "chance 
discharged by a failure to present for acceptance, 
unless the bill expressly provides that it must be 
presented for that purpose, or unless it is payable 
elsewhere than at the residence or place of business 
of the drawee. 

(Opinion of Counsel, Federal Reserve Bulletin, November, 
1916, page 608.) 

The acceptor of a bill of exchange is the prin- Acceptor not 



cipal debtor. The law requires that notice of de- 
mand and protest be given to parties secondarily 



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acceptance 



Rediscounts 109 

liable in case of dishonor. This right to receive 
notice is a personal one which may be waived by the 
parties entitled thereto, that is, the drawer and in- 
dorser ; but such waiver has no effect on the acceptor 
or principal debtor. 

(Opinion of Counsel, Federal Reserve Bulletin, September, 
1915, page 277.) 

A sight draft which is accepted by the drawee, Qualified 
payable at a future date, is a qualified acceptance 
which the holder may refuse to take, but if such an 
acceptance is taken by the holder, the drawer and 
indorsers are released unless they have either ex- 
pressly or impliedly authorized the holder to take a 
qualified acceptance or unless they subsequently 
assent thereto. 

(Opinion of Counsel, Federal Reserve Bulletin, June, 1919, 
page 566.) 

Negotiability. 

The negotiability of a bill of exchange is not af - Effect f 
fected by provisions which waive demand, notice, wmt 
and protest; which waive homestead exemption 
rights ; and which provide for the costs of collection 
and attorney's fees. 

(Opinion of Counsel, Federal Reserve Bulletin, May, 1916, 
page 226.) 

A provision in a draft or bill of exchange that it Drafts payable 
is payable "with interest at the rate of — per cent. w 
per annum after maturity, if payment is delayed," 
does not affect the negotiability of the instrument. 

(Opinion of Counsel, Federal Reserve Bulletin, March, 1917, 
page 200.) 

A draft made "payable on arrival of car" is non- ^£jj^ 9 
negotiable, not being payable at a determinable 
future time. 

(Opinion of Counsel, Federal Reserve Bulletin, August, 
1915, page 219.) 



110 



Commercial Banking Practice 



Exchange and 

collection 

charges 



Charges before 
and after maturity 



Drafts payable 
to order of 
drawee 



Acceptance 

without 

drawer's 



Inspection 
of goods 



A bill made payable with "collection charges" is 
not a negotiable instrument, though the Negotiable 
Instruments Law provides that an instrument pay- 
able "with exchange" does not lose its negotiability. 

Counsel suggests that the amount of exchange is 
usually ascertainable in advance while collection 
charges are not so ascertainable. 

(Opinion of Counsel, Federal Reserve Bulletin, November., 

1917, page 880.) 

While a bill containing a provision for payment 
of the costs of collection and attorney's fees, if it is 
dishonored at maturity, is a valid negotiable instru- 
ment, a bill drawn for a fixed sum "with collection 
charges" is not a negotiable instrument unless it 
is so drawn as to show that no collection charges are 
to be included unless the bill is dishonored at ma- 
turity. 

(Opinion of Counsel, Federal Reserve Bulletin, August, 

1918, page 745.) 

A bill made payable to the order of the drawee 
is not negotiable until the drawee as payee has in- 
dorsed it. When it has been accepted and indorsed 
by the drawee it is a valid negotiable instrument in 
the hands of a third party, and the drawer is not 
released, since the terms of his order have been 
specifically complied with. 

(Opinion of Counsel, Federal Reserve Bulletin, February, 

1918, page 110.) 

Under the terms of the negotiable instruments 
law a bill of exchange may be accepted before it 
has been signed by the drawer. 

(Opinion of Counsel, Federal Reserve Bulletin, December, 

1919, page 1157.) 

An express provision in a bill of lading authoriz- 
ing the consignee to inspect the goods before ac- 



Rediscounts 111 

ceptance of the draft to which the bill of lading is 
attached does not affect the negotiability of the 
draft. 

(Ruling, Federal Reserve Bulletin, May, 1919, page 468.) 

DEFINITION OF TRADE ACCEPTANCE 
Regulations of Federal Reserve Board 

A trade acceptance is defined as a draft or bill Trade 
of exchange, drawn by the seller on the purchaser acce P tance 
of goods sold,* and accepted by such purchaser. 

(Regulation A, Series of 1920, A, V.) 



merit 



Opinions and Rulings 

A draft to be eligible as a trade acceptance must Acceptance 
be accepted by the drawee and not by anyone else. y 
(Ruling, Federal Reserve Bulletin, March, 1916, page 112.) 

A trade acceptance containing the statement that statements 
"the obligation of the acceptor hereof arises out of " 
the purchase of goods from the drawer as per in- 
voices, a record of which is given in the subjoined 
statement," is a valid and desirable acceptance when 
offered with the "subjoined statement" detached in 
accordance with directions in the form. 

An acceptance to pay at a particular place dif- Place of 
ferent from the residence of the acceptor is a gen- 
eral acceptance, unless it expressly states that the 
bill is to be paid there and not elsewhere, and does 
not render the bill nonnegotiable. 

(Ruling, Federal Reserve Bulletin, February, 1919, page 
142.) 

*A consignment of goods or a conditional sale of goods can 
not be considered "goods sold" within the meaning of this 
clause. The purchase price of goods plus the cost of labor in 
effecting their installation may be included in the amount for 
which the trade acceptance is drawn. 



payment of 
acceptance 



112 



Commercial Banking Practice 



Discount for 
payment at 
maturity 



Discount for 
prepayment 



Acceptance 
based on 
foreign 
shipments 



Acceptances 
based on 
future pur- 
chases 



A trade acceptance which consists of an order to 
pay a certain amount, which is the amount of the 
debt minus a discount for prompt payment at ma- 
turity, or, if not paid at maturity, to pay a greater 
amount, which is the amount of the debt without 
any discount, is an order to pay a sum certain and 
is negotiable. 

(Opinion of Counsel, Federal Reserve Bulletin, March, 1918, 
page 200.) 

A trade acceptance providing for a fixed dis- 
count, if paid at a certain time before maturity, 
should not be approved for general use by the Fed- 
eral Reserve Board. 

(Opinion of Counsel, Federal Reserve Bulletin, September, 
1918, page 871.) 

On the basis of the facts submitted in this case, it 
is held that a ninety-day sight draft drawn by a firm 
in Calcutta on a company in Boston and accepted 
by that firm, covering a transaction involving the 
transportation of merchandise from Calcutta to 
Honolulu, is a trade acceptance rather than a 
banker's acceptance. 

(Ruling, Federal Reserve Bulletin, December, 1915, page 
404.) 

The fact that importation or exportation is in- 
volved does not exclude the character of a trade 
acceptance. 

(Ruling, Federal Reserve Bulletin, April, 1916, page 168.) 

A bill, in order to be a trade acceptance, must 
arise out of the purchase of goods, and unless that 
purchase is either consummated or actually con- 
tracted for at the. time the bill is drawn, it is doubt- 
ful whether it can properly be said that the obliga- 
tion arises out of the purchase of goods. 

(Ruling, Federal Reserve Bulletin, March, 1917, page 378.) 



Rediscounts 118 

A draft drawn by a casualty company against a Draft *in 
policy holder for premiums could hardly be said to insurance 
be a draft by the seller on the purchaser of goods P remlUI11, 
sold and would not, in the opinion of the Board, 
come within the Board's present definition of a 
trade acceptance. 

(Ruling, Federal Reserve Bulletin, April, 1918, page 309.) 

An acceptance which provides that the drawer Conditional 
is to retain title to the goods until payment of the D ^j* as 
acceptance is not consistent with the requirement 
of a legitimate trade acceptance that the title shall 
have passed to the drawee at the time of acceptance. 
The actual sale of goods and not what is generally 
termed a conditional sale of goods must be the basis 
of the acceptance. 

(Ruling, Federal Reserve Bulletin, October, 1919, page 
964.) 

ELIGIBLE DRAFTS AND TRADE ACCEPTANCES 
Statutory Provisions 

Any Federal reserve bank may discount notes, Commercial 
drafts, and bills of exchange arising out of actual paper 
commercial transactions; that is, notes, drafts, and 
bills of exchange issued or drawn for agricultural, 
industrial, or commercial purposes, or the proceeds Agricultural 
of which have been used, or are to be used, for such paper 
purposes, the Federal Reserve Board to have the 
right to determine or define the character of the 
paper thus eligible for discount, within the mean- 
ing of this Act. Nothing in this Act contained 
shall be construed to prohibit such notes, drafts, 
and bills of exchange, secured by staple agricul- 
tural products, or other goods, wares, or merchan- 



114 



Commercial Banking Practice 



Paper based on 
United States 
obligations 



Paper secured by 
bonds of 
War Finance 
Corporation 



Conditions of 
eligibility 



Commercial 
origin 



Security 



dise from being eligible for such discount ; [or] . . . 
notes, drafts, or bills . . . issued or drawn for the 
purpose of carrying or trading in . . . bonds and 
notes of the Government of the United States. 

(Federal Reserve Act, Section 13.) 

The Federal reserve banks shall be authorized 
. to rediscount eligible paper secured 
by . bonds [of the War Finance Cor- 

poration] and indorsed by a member bank. No dis- 
count or rediscount under this section shall be 
granted at a less interest charge than one per 
centum per annum above the prevailing rates for 
eligible commercial paper of corresponding ma- 
turity. 

(War Finance Corporation Act, Section 13.) 

Regulations of Federal Reserve Board 

The Federal Reserve Board, exercising its 
statutory right to define the character of a note, 
draft, or bill of exchange eligible for rediscount at a 
Federal reserve bank, has determined that — 

It must be a note, draft, or bill of exchange which 
has been issued or drawn, or the proceeds of which 
have been used or are to be used in the first instance, 
in producing, purchasing, carrying, or marketing 
goods* in one or more of the steps of the process of 
production, manufacture, or distribution, or for the 
purpose of carrying or trading in bonds or notes 
of the United States. 

It may be secured by the pledge of goods or 
collateral of any nature, including paper, which is 



*When used in this regulation the word "goods" shall be 
construed to include goods, wares, merchandise, or agricul- 
tural products, including live stock. 



Rediscounts 115 

ineligible for rediscount, provided it (the note, 
draft, or bill of exchange) is otherwise eligible. 
(Regulation A, Series of 1920, A, II.) 

Opinions and Rulings 

Bills drawn for the purpose of providing funds Based on 
for the purchase and export of cross-ties and lum- fwexport 
ber to Cuba are eligible for rediscount if properly 
indorsed and otherwise conforming to the regula- 
tions of the Federal Reserve Board. 

(Ruling, Federal Reserve Bulletin, September, 1915, page 
268.) 

Where a railroad company purchasing supplies Based on 
accepts the draft of the seller and the seller or a raitaad 
third party to whom the draft is sold in good faith su PP ,ies 
discounts it with a member bank, such draft is 
eligible for rediscount with a Federal reserve bank. 

(Opinion of Counsel, Federal Reserve Bulletin, October, 
1918, page 974.) 

An acceptance drawn by a gas producing com- Ba»edon 
pany on a gas distributing company and accepted delivery 
by the latter in payment for gas sold and delivered of gaa 
is a trade acceptance, eligible for rediscount by a 
Federal reserve bank. 

(Ruling, Federal Reserve Bulletin, May, 1918, page 435.) 

A draft drawn by a lumber corporation upon a Jf^ tance * 
sales corporation which it and a number of other corporations 
lumber concerns have organized will, when ac- 
cepted, become a trade acceptance, even though the 
selling corporation is a stockholder of the sales cor- 
poration, provided the latter is organized in good 
faith and not merely to act as an agent for the pur- 
pose of evading the law. 

(Opinion of Counsel, Federal Reserve Bulletin, January, 
1918, page 33.) 



116 



Commercial Banking Practice 



Acceptance 
before de- 
livery on 
installment 
plan sales 



Based on 

building 

operations 



Based on 
electrical 

installation 



Based on 

retail 

transactions 



Regarding the use of trade acceptances in con- 
nection with the sale of coffee mills, etc., on an 
installment plan, if the purchaser is willing to ac- 
cept a draft in advance of the delivery of the goods 
there would seem to be no reason why such an 
acceptance should not be treated on the same basis 
as a bill drawn and accepted after delivery of such 
goods. 

(Ruling, Federal Reserve Bulletin, May, 1918, page 437.) 

It is impossible to promulgate any general 
ruling. There does not seem to be any doubt that 
a draft drawn by a manufacturer or material man 
upon a builder to cover the cost of materials sold 
to the builder is eligible for rediscount as a trade 
acceptance when accepted by the builder. It is 
equally clear, however, that if the contractor, for 
instance, does not get title either to the materials 
furnished or to the building as it is being erected, 
he can not properly make a trade acceptance of a 
draft drawn upon him by the subcontractor or 
builder, it being apparent that he has not been the 
purchaser of goods sold within the meaning of the 
Board's regulations. The Board is not inclined to 
extend the scope of its definition of the word 
"goods" to include labor alone. 

(Ruling, Federal Reserve Bulletin, June, 1919, page 565.) 

Drafts drawn for the purchase price of electrical 
goods, including the cost of installation, may be 
treated as trade acceptances when such drafts are 
accepted by the purchaser. 

(Ruling, Federal Reserve Bulletin, April, 1918, page 310.) 

A bill of exchange drawn by the seller of goods 
and accepted by the purchaser of those goods is a 
trade acceptance, regardless of whether or not the 



Rediscounts 117 

purchaser intends to resell the goods or to use them 
for his own purpose. Therefore, a retail dealer 
may finance the sale of his goods to a retail cus- 
tomer by means of the trade acceptance. 

A bill drawn by a retail dealer on his retail cus- 
tomer to finance the sale of goods to that customer 
is a trade acceptance within the meaning of the Acceptances in 
Board's regulations, even though it is drawn after $ open " 
the purchaser has failed to remit promptly on an accou nt« 
open account. 

The Board is of the opinion, however, that the 
attempt to use a trade acceptance in this manner as 
a means of liquidating an otherwise slow account 
would involve considerable danger to the primary 
purposes of the trade acceptance movement and 
would subordinate the trade acceptance to the open 
account by suggesting it as a last resort for bad 
debts. 

While, therefore, trade acceptances of this char- 
acter should probably be considered eligible as a 
matter of law, nevertheless member banks and Fed- 
eral reserve banks should be encouraged to discrim- 
inate against them as far as possible. 

(Ruling, Federal Reserve Bulletin, January, 1918, page 30.) 

Drafts of cotton producers or owners drawn 
upon and accepted by cotton factors may be eli- cottoSctors 
gible for rediscount when discounted by the 
drawers. 

(Ruling, Federal Reserve Bulletin, November, 1920, page 
1177.) 

The Federal Reserve Board may properly rule ^awtis"^^'^ on 
that a draft or bill of exchange drawn by the seller 
on the purchaser of advertising space and accepted 
by such purchaser is a trade acceptance. 

(Opinion of Counsel, Federal Reserve Bulletin, February, 
1917, page 116.) 



118 Commercial Banking Practice 

Conditions A draft or bill of exchange drawn by a publisher 

or other advertising agency on the purchaser of ad- 
vertising space, and accepted by such purchaser, 
shall be considered a trade acceptance, provided the 
advertisement on which the draft or bill is based is 
for the purpose of promoting or facilitating the 
production, manufacture, distribution, or sale of 
goods, wares, merchandise, or agricultural prod- 
ucts, including live stock, and provided, further, 
that such advertisement is not illegal and is not for 
the purpose of promoting or facilitating any trans- 
action which is prohibited by the laws of the state 
in which it is to be consummated. 

(Ruling, Federal Reserve Bulletin, February, 1917, page 
114.) 

Domicile Although a draft drawn by an American ex- 

porter upon a foreign buyer and accepted by that 
buyer payable in the United States in dollars may 
be technically eligible for discount under the terms 
of section 13 of the Federal Reserve Act, neverthe- 
less, a Federal reserve bank may, in its discretion, 
decline to discount such an acceptance on the 
ground that inasmuch as it is a domicile bill, it is 
not a desirable investment. 

(Opinion of Counsel, Federal Reserve Bulletin, April, 1920, 
page 386.) 

INELIGIBLE DRAFTS AND TRADE ACCEPTANCES 
Statutory Provisions 

Security The Federal Reserve Board . . . [shall] have 

paper the right to determine or define the character of the 

paper thus eligible for discount, within the meaning 
of this Act . . . but such definition shall not include 
notes, drafts, or bills covering merely investments 
or issued or drawn for the purpose of carrying or 



Rediscounts 119 

trading in stocks, bonds, or other investment securi- 
ties, except bonds and notes of the Government 
of the United States. 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

The paper must not be a note, draft, or bill of ^j 8 or 
exchange the proceeds of which have been used or investments 
are to be used for permanent or fixed investments 
of any kind, such as land, buildings, or machinery, 
or for any other capital purpose. 

The paper must not be a note, draft, or bill of Speculative 
exchange the proceeds of which have been used or ° r ap fi e " ance 
are to be used for investments of a purely specula- 
tive character or for the purpose of lending to some 
other borrower. 

(Regulation A, Series of 1920, A, II.) 

Opinions and Rulings 
The Board's conception of the trade acceptance Draft* to finance 

! . i • i • • capital re- 

is that it is an instrument which carries upon its quirements 
face the evidence of the commercial character of the 
transaction which gave it birth. The finance paper 

of the Corporation issued against drafts 

drawn by it on dealers and placed in trust to secure 
such paper issued by it in the shape of notes or cer- 
tificates gives no indication whatever as to the 
nature of the security, which may or may not be 
eligible paper. 

It appears to the Board that the Cor- 
poration by issuing notes of this character is really 
raising money for capital requirements for similar 
transactions in the future, and that the whole plan 
is in essence a finance operation rather than a com- 
mercial transaction. 

(Ruling, Federal Reserve Bulletin, February, 1918, page 
109.) 



120 



Commercial Banking Practice 



Draft* 

against 
wine in 
bond 



Drafts to 
finance 
war savings 



Financial 
statements 



Character 
of evidence 



Stamp 
is not 
conclusive 



The Board is of the opinion that a warehouse 
receipt covering wine in bond, whether intended for 
sacramental or other purposes, can not be consid- 
ered a receipt conveying or securing title to "readily 
marketable staples" within the meaning of section 
13 of the Federal Reserve Act, and consequently 
that drafts secured by warehouse receipts covering 
such wine are not eligible for rediscount by Federal 
reserve banks. 

(Ruling, Federal Reserve Bulletin, April, 1921, page 419.) 

Notes, drafts, and bills of exchange which are 
secured by war savings stamps and the proceeds of 
which were used to purchase or carry war savings 
stamps are ineligible for rediscount with a Federal 
reserve bank. 

(Opinion of Counsel, Federal Reserve Bulletin, July, 1918, 
page 637.) 

EVIDENCE OF ELIGIBILITY 
Regulations of Federal Reserve Board 

A Federal reserve bank shall take such steps as 
it deems necessary to satisfy itself as to the eli- 
gibility of the draft, bill, or trade acceptance offered 
for rediscount and may require a recent financial 
statement of one or more parties to the instrument. 
The draft, bill, or trade acceptance should be drawn 
so as to evidence the character of the underlying 
transaction, but if it is not so drawn evidence of 
eligibility may consist of a stamp or certificate af- 
fixed by the acceptor or drawer in a form satisfac- 
tory to the Federal reserve bank. 

(Regulation A, Series of 1920, A, V.) 

Opinions and Rulings 

The fact that a land company has stamped a 
bill a trade acceptance and has signed such state- 



Rediscounts 121 

ment as "acceptor" does not in itself make it a trade 
acceptance. 

(Ruling, Federal Reserve Bulletin, March, 1916, page 112.) 

MATURITY 
Opinions and Rulings 

A draft made "payable on arrival of car" is non- Drafts 
negotiable, not being payable at a determinable ^(Sition 
future time, and is therefore ineligible for redis- 
count by a Federal reserve bank. 

(Opinion of Counsel, Federal Reserve Bulletin, August, 
1915, page 219.) 

Drafts payable "ninety days from date or before Draft, paya bie 
on five days after demand (i. e., on five days' notice) " on ? r before" 
by the holder hereof" are negotiable and eligible for 
discount with a Federal reserve bank. 

(Opinion of Counsel, Federal Reserve Bulletin, April, 1917, 
page 291.) 

See also "Rediscount of Promissory Notes," 
pages 94-96, above. 

AMOUNT OF PAPER OF ONE INTEREST 
REDISCOUNTABLE FOR ONE MEMBER BANK 

Opinions and Rulings 

What Constitutes "Actually Existing Values." 

A trade acceptance may or may not be classified Trade 
as a bill of exchange drawn against actually existing acce P tances 
values. 

Section 13 of the Federal Reserve Act limits the Ten per cent, 
amount of paper of any one borrower rediscounted ,,m,t 
for any one bank to ten per cent, of such bank's 
capital and surplus ; and trade acceptances are sub- 
ject to this limitation, unless they can be classified 
as "bills of exchange drawn against actually exist- 
ing values." 



122 



Commercial Banking Practice 



Acceptance 
before sale 
or delivery 



Drafts 
discounted 
before 
acceptance 



Acceptances 

without 

documents 



Trade acceptances 
for long standing 
open accounts 



Bills drawn by the seller against the purchaser 
and accepted before the sale or delivery of the goods 
should not be treated as bills drawn against actually 
existing values, since such goods are not in the pos- 
session of the drawee either in the original form 
or in the shape of the proceeds of their sale ; except 
where the goods have passed out of the possession 
of the drawer and have been placed in storage sub- 
ject to the control or order of the drawee. 

(Opinion of Counsel, Federal Reserve Bulletin, October, 
1918, page 974.) 

A bill of exchange discounted before acceptance 
may be said to be drawn against actually existing 
values, within the meaning of section 13 of the 
Federal Reserve Act, when and only when it is 
accompanied by shipping documents, warehouse re- 
ceipts, or other papers securing title to the goods 
sold. 

An accepted bill of exchange, unaccompanied by 
shipping documents or other such papers, may be 
considered as drawn against actually existing 
values if drawn against the drawee at the time of, 
or within a reasonable time after, the shipment or 
delivery of the goods sold. In this latter case there 
must be reasonable grounds to believe that the 
goods are in existence in the hands of the drawee 
either in their original form or in the shape of the 
proceeds of their sale. 

(Opinion of Counsel, Federal Reserve Bulletin, March, 
1917, page 195.) 

A bill drawn for a balance due on open account 
of long standing, which is accepted by the debtor, 
might constitute a trade acceptance, but in order 
for it to be excepted from the limitations imposed 
by section 13 of the Federal Reserve Act as a bill of 



Rediscounts 123 

exchange drawn against actually existing value, it 
must have been drawn contemporaneously with, or 
within such a reasonable time after, the shipment of 
the goods as to justify the assumption that the 
goods are in the hands of the drawee in their original 
form or in the form of proceeds of sale. 

As evidence of this fact, Federal reserve banks Evidence of 
might reasonably require such trade acceptances as v £j!» ,,y easling 
are offered as "bills of exchange drawn against 
actually existing value" to show the date of invoice, 
so that it may be determined whether or not the ac- 
count is one of long standing. 

(Ruling, Federal Reserve Bulletin, April, 1917, page 287.) 

A bill of exchange drawn payable "at sight" and Qualified 
accepted payable in three months is a qualified or 
conditional acceptance, and the maker and prior 
indorsers are released. The instrument in effect 
becomes the promissory note of the acceptor, and 
would not come within the exception to section 13 
of a bill of exchange drawn in good faith against 
actually existing value. 

(Opinion of Counsel, Federal Reserve Bulletin, September, 
1916, page 463.) 

In the opinion of the Board, accepted demand J^ pl j d 
bills on which the drawer is released from liability bills 
are not "bills of exchange" within the meaning of 
section 13 and must, therefore, be included in de- 
termining the limits on the amount of paper of any 
one borrower which a Federal reserve bank may 
rediscount for any member bank. 

(Opinion of Counsel, Federal Reserve Bulletin, November, 
1919, page 1055.) 

See also "Rediscount of Promissory Notes," 
pages 97-103, above. 



124 Commercial Banking Practice 

AGGREGATE AMOUNT REDISCOUNTABLE FOR 
ONE BANK 

See "Rediscount of Promissory Notes," pages 
103-104, above. 

INDORSEMENT OF MEMBER BANKS 

See "Rediscount of Promissory Notes," page 
104, above. 

REDISCOUNT FOR NONMEMBER BANKS 

See "Rediscount of Promissory Notes," pages 
104-106, above. 



Rediscount of Six Months' Agricultural 

Paper 

DEFINITION 

Regulations of Federal Reserve Board 

Six months' agricultural paper, within the mean- Live stock 
ing of this regulation, is defined as a note, draft, JXed 
bill of exchange, or trade acceptance drawn or is- 
sued for agricultural purposes, or based on live 
stock; that is, a note, draft, bill of exchange, or 
trade acceptance the proceeds of which have been 
used, or are to be used, for agricultural purposes, 
including the breeding, raising, fattening, or mar- 
keting of live stock, and which has a maturity at 
the time of discount of not more than six months, 
exclusive of days of grace. 

(Regulations of Federal Reserve Board, Regulation A, Series 
of 1920, A, VI.) 

Opinions and Rulings 

The term "live stock" is held to include not only y Te s t oc k 
beef cattle, but also horses and mules. 

(Ruling, Federal Reserve Bulletin, June, 1915, page 72.) 

Notes made by mule and cattle dealers are mer- Note* of 
cantile rather than agricultural paper. caltle deaIers 

(Ruling, Federal Reserve Bulletin, August, 1915, page 212.) 

A note made by a dealer in agricultural imple- Note* of 
ments is not agricultural paper. 

(Ruling, Federal Reserve Bulletin, August, 1915, page 212.) 

Paper covering sales by a manufacturer of agri- Sales to 
cultural implements to a dealer for resale by him ,mpemenl eaers 
to a farmer would have to be treated as commercial 
and not as agricultural paper. 

(Ruling, Federal Reserve Bulletin, November, 1918, page 
1118.) 



mplement dealers 



126 



Commercial Banking Practice 



Agricultural 
and com- 
mercial paper 
distinguished 



The purchase and sale of any articles or com- 
modities including agricultural products is a com- 
mercial rather than an agricultural transaction. 
The note of a farmer, however, given in payment 
for articles or commodities purchased may be con- 
sidered agricultural paper, provided that the ar- 
ticles or commodities purchased are to be used by 
the farmer for agricultural purposes and are not 
in the nature of permanent or fixed investments. 

(Ruling, Federal Reserve Bulletin, December, 1920, pages 
1302, 1303.) 



Agricultural 
purposes 



Authority of 
Federal 
Reserve Board 



Limitations 



ELIGIBLE AGRICULTURAL PAPER 
Statutory Provisions 

Any Federal reserve bank may discount .... 
notes, drafts, and bills of exchange issued or drawn 
for agricultural .... purposes, or the proceeds 
of which have been used, or are to be used, for 
such purposes, the Federal Reserve Board to 
have the right to determine or define the char- 
acter of the paper thus eligible for discount, with- 
in the meaning of this Act. Nothing in this Act 
contained shall be construed to prohibit such notes, 
drafts, and bills of exchange, secured by staple 
agricultural products .... from being eligible 
for such discount .... Notes, drafts, and bills 
drawn or issued for agricultural purposes or based 
on live stock and having a maturity not exceeding 
six months, exclusive of days of grace, may be dis- 
counted in an amount to be limited to a percentage 
of the assets of the Federal reserve bank, to be 
ascertained and fixed by the Federal Reserve 
Board. 

(Federal Reserve Act, Section 13.) 



Rediscounts 127 

Regulations of Federal Reserve Board 

To be eligible for rediscount, six months' agri- Conditions 

cultural paper, whether a note, draft, bill of ex- ofeU « ibi,ity 

change, or trade acceptance, must comply with the 

respective sections of this regulation* which would 

apply to it if its maturity were ninety days or less. 

(Regulations of Federal Reserve Board, Regulation A, 
Series of 1920, A, VI.) 

Opinions and Rulings 

A farmer's six months' note for commercial fer- Notes for 
tilizer, discounted and indorsed by a member bank, e lzer 
is agricultural paper eligible for rediscount with 
the Federal reserve bank. 

(Ruling, Federal Reserve Bulletin, June, 1915, page 75.) 

The Act does not require the taking of chattel Chattel mortgages 
mortgages as security for loans based on agricul- unneceMa,y 
tural operations. The statement of the member 
bank to this effect must ordinarily be accepted. 
The direct, primary purpose of the loan should be 
for the ordinary operations of agriculture. Words 
"based on" are not considered synonymous with 
"secured by." Agricultural paper need not be di- 
rectly secured by agricultural products, but should 
be genuinely based upon transactions entered upon 
for agricultural operations. General banking pru- 
dence and knowledge should be applied. 

(Ruling, Federal Reserve Bulletin, June, 1915, page 72.) 

Notes signed by a farmer, the proceeds of which Notes for 
are used for the purchase of cows to be used as dairy dalry calt e 
cattle, are eligible for rediscount at the discretion 
of the Federal reserve bank notwithstanding the 

*For conditions of eligibility of promissory notes, see pages 
77-94, above. For conditions of eligibility of drafts and trade 
acceptances, see pages 113-121, above. 



128 Commercial Banking Practice 

fact that the cattle are not primarily purchased for 
"breeding, raising, fattening, and marketing of 
live stock." 

(Ruling, Federal Reserve Bulletin, March, 1916, page 112.) 

hreeiSiii" Loans on cattle for breeding, grazing, or fatten- 

graring.or ing may be made under the classification of six 

attening months' agricultural paper and the paper may be 

rediscounted by a member bank at its Federal re- 
serve bank. 

(Ruling, Federal Reserve Bulletin, December, 1916, page 
679.) 

Use ° f A loan made by a member bank in good faith to 

mortgages J ,~ 

a farmer for the purpose of assisting him to produce 
a crop to fatten his cattle would be eligible for dis- 
count by a Federal reserve bank, whether secured 
by mortgage or not, but most of the farmers' notes 
which have been discounted with Federal reserve 
banks for member banks are secured by chattel 
mortgages. 

(Ruling, Federal Reserve Bulletin, May, 1917, page 378.) 

Farm Farm tools, agricultural implements and machin- 

ery, or other farm operating equipment do not 
constitute permanent and fixed investments when 
they are of such character that they have to be re- 
placed within a comparatively short time, so that it 
may be assumed that a certain amount of money 
would be spent annually and regularly for their re- 
placement. Notes of farmers or consumers given 
for the purchase price of such equipment are dis- 
countable as notes drawn or issued for agricultural 
purposes. 

(Ruling, Federal Reserve Bulletin, December, 1920, page 
1302.) 



Rediscounts 129 

Presentation of notes of farmers or consumers Presentation 
for the purchase price of farm tools or agricultural y 
machinery by the dealer with his indorsement for 
rediscount does not change their classification as for 
agricultural purposes. 

(Ruling, Federal Reserve Bulletin, February, 1916, page 
67.) 

Where tractors are used to supplement the work Notes for 
of horses or mules, or are used altogether instead of Actors 
these animals, it is held that notes given by farmers 
for the purchase price of tractors, and maturing 
within six months, should be admitted to discount 
as agricultural paper. 

(Ruling, Federal Reserve Bulletin, April, 1918, page 309.) 

Farmers' notes, the proceeds of which are used piling and 
for tilling farms or for draining land already in 
use as farm land, should be classified as agricultural 
paper and are eligible for rediscount. 

(Ruling, Federal Reserve Bulletin, August, 1918, page 743.) 

A note given for the purchase price of a com- Discount by 

modity can be classed as agricultural paper eligible Indorse™ 

for rediscount when having a maturity in excess of 

ninety days, if the maker is to use the commodity for 

an agricultural purpose, regardless of whether the 

note is discounted by the maker or by the indorser. 

(Opinion of Counsel, Federal Reserve Bulletin, April, 1918, 
page 312). 

Where a farmer makes his note payable to the Paper 
seller of a commodity, and actually uses the com- Sr of 
modity for agricultural purposes, such a note may commodi, y 
be treated as agricultural paper, whether discounted 
with the member bank by the farmer as the maker 
or by the seller as the indorser. 



130 Commercial Banking Practice 

Paper Where the farmer makes his note payable to the 

tobLik member bank and uses the proceeds for an agri- 

cultural purpose, such a note may likewise be dis- 
counted by a Federal reserve bank as agricultural 
paper. If, however, in either of the foregoing cases 
the farmer does not use or intend to use the com- 
modity purchased for an agricultural purpose, al- 
though it is capable of being so used, the note in 
question should be treated as commercial paper and 
not as agricultural paper. 

(Ruling, Federal Reserve Bulletin, April, 1918, page 310.) 

Paper of Where there is offered for rediscount as agricul- 

trrigation i • i 

company tural paper the note of an irrigation company which 

owns and operates an irrigation system and a rice 
farm, the Federal reserve bank must be satisfied 
that the proceeds of the particular note have been 
in fact used for an agricultural purpose in connec- 
tion with the rice farm, as distinguished from a com- 
mercial purpose in connection with the delivery and 
sale of water to farmers through the irrigation 
system. 

(Ruling, Federal Reserve Bulletin, September, 1920, page 
949.) 

Note for A farmer's note given to an irrigation company 

purpose" in payment for a supply of water which has been or 

is to be used for current agricultural purposes is a 
note which has been issued by the farmer for an 
agricultural purpose and may, therefore, be eligible 
for discount with a maturity not in excess of six 
months, provided, of course, it complies in other 
respects with the provisions of the law and the regu- 
lations of the Board. 

(Ruling, Federal Reserve Bulletin, August, 1921, page 964.) 



Rediscounts 131 

Drafts drawn by cotton growers, accepted by a Acceptances 
cooperative marketing association organized for the maXS ve 
purpose of marketing the cotton delivered by the as s °c iations 
growers, and discounted by the growers at their 
banks may be eligible for rediscount when it is 
shown that the proceeds of the accepted drafts have 
been or are to be used by the growers for agricul- 
tural purposes. 

(Ruling, Federal Reserve Bulletin, November, 1920, page 
1177; see also October, 1921, page 1200.) 

The nature of the bill, the name of the acceptor, identification 
and the name of the drawer would probably indi- £ ap a e s r r,c 
cate that a farmer was the purchaser, and an im- 
plement dealer, the seller of the goods. However, 
the purchasing member bank will have to satisfy 
itself in some satisfactory way that the bill is sub- 
stantially of an agricultural character. A simple 
memorandum attached to the bill, stating that the 
bill was drawn in payment of agricultural imple- 
ments, signed either by the acceptor or the drawer, 
would probably be considered sufficient evidence 
by the member bank and the Federal reserve bank. 

(Ruling, Federal Reserve Bulletin, February, 1916, pages 
67, 68.) 

INELIGIBLE AGRICULTURAL PAPER 

The bill or note of a packing company, the pro- *}$ es ? T 

ceeds of which are used for the purchase of live packing 

stock which is slaughtered upon purchase, is not con, P any 

"based on live stock" within the meaning of section 

13, and is, therefore, not eligible for rediscount if 

it has a maturity in excess of ninety days. 

(Opinion of Counsel, Federal Reserve Bulletin, August, 
1917, page 616.) 

Where the proceeds of a note made by a mer- ****■■• 
chant are used to purchase millet seed to be later resale 



132 



Commercial Banking Practice 



Note of 

irrigation 

company 



Paper 
secured 
by chattel 
mortgage 



Permanent 
or fixed 
investments 



Purchase 
of silos 



retailed or sold, such a note can not be treated as 
one given for an agricultural purpose and can not 
be discounted by a Federal reserve bank if it has 
a maturity at time of discount of more than ninety 



(Opinion of Counsel, Federal Reserve Bulletin, October, 
1916, page 526.) 

A note of an irrigation company can not be 
classed as agricultural paper and can not be eligible 
for discount by Federal reserve banks if it has a 
maturity in excess of ninety days. 

(Ruling, Federal Reserve Bulletin, August, 1921, page 964.) 

A promissory note even though secured by col- 
lateral notes which in turn are secured by chattel 
mortgages on cattle would not be eligible for redis- 
count by a Federal reserve bank because it is not 
drawn for an agricultural, industrial or commer- 
cial purpose. 

(Ruling, Federal Reserve Bulletin, September, 1917, page 
691.) 

A note of a farmer discounted by him at his 
local bank to provide funds with Avhich to purchase 
articles for agricultural uses is ineligible for redis- 
count if the articles are in the nature of permanent 
or fixed investments. 

(Ruling, Federal Reserve Bulletin, December, 1920, page 
1302.) 

Silos are considered to be permanent or fixed im- 
provements, and it would require a forced construc- 
tion of the Act to treat paper given for their pur- 
chase as eligible for rediscount as agricultural 
paper. 

(Ruling, Federal Reserve Bulletin, October, 1918, page 
971.) 



Rediscounts 138 

The Board has ruled upon the basis of facts in a Electric 
particular case that an electric system for furnish- 
ing light and power for an individual farm is in the 
nature of a permanent or fixed investment. 

(Ruling, Federal Reserve Bulletin, December, 1920, page 
1302.) 

AMOUNT OF PAPER REDISCOUNTABLE BY A 
FEDERAL RESERVE BANK 

Statutory Provisions 

Notes, drafts, and bills drawn or issued for agri- JJjJJJjJJ 
cultural purposes or based on live stock, and having Reserve 
a maturity not exceeding six months, exclusive of 
days of grace, may be discounted in an amount to 
be limited to a percentage of the assets of the 
Federal reserve bank, to be ascertained and fixed 
by the Federal Reserve Board. 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 
The law prescribes that in the aggregate the total j^*. * 



bank 



amount of agricultural paper purchased by a Fed- paper redis- 
eral reserve bank should not exceed a fixed per- ^^ e e 7 
centage of its capital stock, to be fixed from time 
to time for each Federal reserve bank by the Fed- 
eral Reserve Board. The percentage fixed by the 
Board differs in the various districts. Whenever 
a district has applied, the maximum limit has been 
granted, which has been considered to be ninety- 
nine per cent, of the capital stock. 

(Ruling, Federal Reserve Bulletin, February, 1916, page 
68.) 



For other provisions governing the rediscount of 
agricultural paper, see pages 97-106, 121-123, above. 



134 



Commercial Banking Practice 



Banker's 
acceptance 



Eligible 
acceptors 



Conditions 
of negotiability 



Conditional 
bill 



Rediscount of Bank Acceptances 

DEFINITION 
Regulation of Federal Reserve Board 

A banker's acceptance within the meaning of this 
regulation is defined as a draft or bill of exchange, 
whether payable in the United States or abroad and 
whether payable in dollars or some other money, of 
which the acceptor is a bank or trust company, or a 
firm, person, company, or corporation engaged gen- 
erally in the business of granting bankers' accept- 
ance credits. 

(Regulation A, Series of 1920, B.) 

Opinions and Rulings 

The question of determining the eligibility of an 
acceptor under the regulation is left to the discre- 
tion of Federal reserve banks themselves. It is, of 
course, understood that the board would not wish to 
see concerns regarded as eligible acceptors which 
are not in the habit of carrying on some acceptance 
business regularly and are not generally of such 
character and standing as to qualify their accept- 
ance as a "banker's acceptance." 

(Ruling, Federal Reserve Bulletin, November, 1915, page 
862.) 

A bill of exchange, in order to be negotiable, 
must be an unconditional order to pay, on demand 
or at a fixed or determinable future time, a certain 
sum of money to order or to bearer. If payment 
is dependent upon the happening of a certain con- 
tingency, the bill is conditional and nonnegotiable. 
If payment is confined to the proceeds of a particu- 
lar fund and is not chargeable to the general credit 
of the drawer, the bill is conditional and non- 
negotiable. 



Rediscounts 135 

A general acceptance of a conditional bill or a Conditional 
conditional acceptance of an unconditional bill acce P tance 
makes the acceptance a conditional one and de- 
stroys its negotiability. 

(Opinion of Counsel, Federal Reserve Bulletin, May, 1915. 
page 21.) 

ELIGIBLE BANK ACCEPTANCES 

Statutory Provisions 

Any Federal reserve bank may discount accept- Conditions 
ances of the kinds hereinafter described,* which e[ igib a ily 
have a maturity at the time of discount of not more 
than three months' sight, exclusive of days of grace, 
and which are indorsed by at least one member 
bank. 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

A Federal reserve bank may discount any 
. . . . [banker's acceptance] having a maturity 
at time of discount of not more than three months, 
exclusive of days of grace, which has been drawn 
under a credit opened for the purpose of conducting 
or settling accounts resulting from a transaction or 
transactions involving any one of the following: 

(1) The shipment of goods between the United Foreign 
States and any foreign country, or between the * pme 
United States and any of its dependencies or insu- 
lar possessions, or between foreign countries. While 
it is not necessary that shipping documents cover- 
ing goods in the process of shipment be attached to 
drafts drawn for the purpose of financing the ex- 
portation or importation of goods, and while it is 
not essential, therefore, that each such draft cover 

* See Part I, "General Statutory Provisions," pages 9-10, 
above. 



136 



Commercial Banking Practic 



Documents 



Domestic 
shipments 



Storage 
of staples 



specific goods actually in existence at the time of 
acceptance, nevertheless it is essential as a prere- 
quisite to eligibility either (a) that shipping docu- 
ments or a documentary export draft be attached 
at the time the draft is presented for acceptance, or 
(b) if the goods covered by the credit have not been 
actually shipped, that there be in existence a spe- 
cific and bona fide contract providing for the ex- 
portation or importation of such goods at or within 
a specified and reasonable time and that the cus- 
tomer agree that the accepting bank will be fur- 
nished in due course with shipping documents cov- 
ering such goods or with exchange arising out of 
the transaction being financed by the credit. A 
contract between principal and agent will not be 
considered a bona fide contract of the kind required 
above, nor is it enough that there be a contract 
providing merely that the proceeds of the accept- 
ance will be used only to finance the purchase or 
shipment of goods to be exported or imported. 

(2) The shipment of goods within the United 
States, provided shipping documents conveying 
security title are attached at the time of accept- 
ance, or 

(3) The storage of readily marketable staples,* 
provided that the bill is secured at the time of ac- 
ceptance by a warehouse, terminal, or other similar 
receipt, conveying security title to such staples, is- 
sued by a party independent of the customer, and 
provided further that the acceptor remains secured 

*A readily marketable staple within the meaning of these 
regulations may be defined as an article of commerce, agricul- 
ture, or industry of such uses as to make it the subject of con- 
stant dealings in ready markets with such frequent quotations 
of price as to make (a) the price easily and definitely ascer- 
tainable and (b) the staple itself easy to realize upon by sale 
at any time. [For specific rulings, see pages 43-45, above.] 



Rediscounts 137 

throughout the life of the acceptance. In the event withdrawal 
that the goods must be withdrawn from storage froin8tora 8 e 
prior to the maturity of the acceptance or the re- 
tirement of the credit, a trust receipt or other simi- 
lar document covering the goods may be substi- 
tuted in lieu of the original document, provided 
that such substitution is conditioned upon a reason- 
ably prompt liquidation of the credit. In order to 
insure compliance with this condition it should be 
required, when the original document is released, 
either (a) that the proceeds of the goods will be 
applied within a specified time toward a liquidation 
of the acceptance credit or (b) that a new docu- 
ment, similar to the original one, will be resubsti- 
tuted within a specified time. 

A Federal reserve bank may also rediscount any Dollar 
bill drawn by a bank or banker in a foreign country e £ c }™ ge 
or dependency or insular possession of the United 
States for the purpose of furnishing dollar ex- 
change, as provided in regulation C, provided that 
it has a maturity at the time of discount of not 
more than three months, exclusive of days of grace. 

(Regulation A, Series of 1920, B.) 

Opinions and Rulings 

The term "shipping documents" as used in the 
regulation includes an order bill of lading or a 
straight bill of lading, whichever is issued by the 
carrier in the particular case, but does not include 
freight receipts or mere copies of original bills of 
lading. The purpose of the requirement that the . 
accepting bank shall be furnished with shipping documents 
documents is not merely evidentiary, but is also to lushed 
put the accepting bank in possession of the original 
documents, so that it may protect itself by retaining p oge o| 
such documents until it is put in funds to meet the requirement 



138 Commercial Banking Practice 

acceptance. It is realized that this protection is 
not always absolute and that the protection af- 
forded by possession of a straight bill of lading is 
not so great as that afforded by possession of an 
order bill of lading. It is not the purpose of the 
Board, however, to prescribe the type of bill of 
lading to be issued in the particular case, but only 
to require the accepting bank to be furnished with 
the best security which has been issued by the car- 
rier in the particular transaction. 

The Board rules, therefore, that the customer 
must furnish the original bills of lading and that 
the requirement of the regulation will not be satis- 
fied by the furnishing of freight receipts or non- 
negotiable copies of the bills of lading. This does 
not, however, mean that the bills of lading must 
document! necessarily be sent to the accepting bank. The 

Board has ruled in connection with domestic ac- 
ceptances that documents are legally in the posses- 
sion of the accepting bank when they are held by 
its correspondent, or by some other independent 
party, as its agent, and the principle of this ruling 
can be applied in dealing with the shipping docu- 
ments to be furnished to banks accepting drafts 
drawn in foreign transactions. 

(Ruling, Federal Reserve Bulletin, February, 1921, page 
191.) 

Exchange Acceptances drawn to finance the purchase or 

trans?"* production of goods under contract for export are 

action8 eligible for rediscount or purchase only when the 

customer definitely agrees that the accepting bank 
will be furnished in due course with shipping docu- 
ments covering such goods. 

The furnishing of "exchange arising out of the 
transaction being financed by the credit" is in- 



Rediscounts 139 

tended as an alternative to the furnishing of ship- 
ping documents only in import transactions. 

(Ruling, Federal Reserve Bulletin, January, 1921, page 71.) 

There is some doubt in the courts whether the Reference to 
mere reference to a particular consignment of goods ^edon 1 
makes the bill conditional, some courts stating that imports or 
it is merely an indication of the fund out of which exp ° ' 
the drawee is to reimburse himself; other courts 
holding that it makes the bill conditional because 
limiting payment to the proceeds of the particular 
shipment referred to. There is no doubt, however, 
that a reference, in general terms, on the face of 
an accepted bill to the effect that it is based on the 
exportation or importation of goods would not 
make it conditional and nonnegotiable, and it would 
not, therefore, be ineligible for discount under the 
provisions of section 13 of the Federal Reserve Act. 

(Opinion of Counsel, Federal Reserve Bulletin, May, 1915, 
page 21.) 

Federal reserve banks may, under the provisions Acceptances 
of section 13, discount acceptances based on the im- member bank of 
portation or exportation of goods, provided they another d " tricl 
have a maturity at time of discount of not more 
than three months, and provided, further, that they 
are indorsed by at least one member bank. It is im- 
material whether this member bank is located in the 
district of the Federal reserve bank which is mak- 
ing the discount or in any other district, the term 
"member bank" being broad enough to include 
member banks wherever located. 

(Opinion of Counsel, Federal Reserve Bulletin, June, 1915, 
page 98.) 

The Board has ruled that a draft drawn by an Shipment 
American exporter covering cotton consigned to ©ncon- 
his European agent may be eligible for rediscount SI 8 nment 



140 



Commercial Banking Practice 



Based on 
shipment 
of cattle 



Warehouse 
receipts of 
independent 
warehouses 



Foreign 

warehouse 

receipts 



when shipping documents covering goods actually 
shipped for export are attached at the time the 
draft is presented for acceptance, although the 
goods covered by the documents have not been sold 
but are merely shipped on consignment to the ex- 
porter's agent abroad. 

(Ruling, Federal Reserve Bulletin, April, 1921, page 419.) 

The Board has ruled that a national bank may 
accept a draft drawn upon it if secured at the time 
of acceptance by a bill of lading covering a ship- 
ment of cattle to a cattle raiser who has purchased 
them with the intention of fattening and reselling 
them. The period covered by the acceptance, how- 
ever, should not be in excess of the period of credit 
which is usual and reasonably necessary to finance 
transactions of this character. Such acceptances 
when discounted and indorsed by a member bank, 
other than the accepting bank, are eligible for re- 
discount with a Federal reserve bank, provided they 
have maturities at the time they are offered for re- 
discount not in excess of three months and comply 
in all other respects with the provisions of the Act 
and the regulations. 

(Ruling, Federal Reserve Bulletin, July, 1921, page 815.) 

In purchasing or discounting bankers' accept- 
ances or other bills which are secured by warehouse 
receipts, etc., the Federal reserve banks should 
make sure that the receipt is issued by a warehouse 
which is independent of the borrower. 

(Ruling, Federal Reserve Bulletin, January, 1917, page 
30.) 

A draft drawn abroad, payable in the United 
States in dollars and secured by a warehouse receipt 
covering readily marketable staples stored in a 
warehouse located in a foreign country, is eligible 



Rediscounts 141 

for acceptance by a member bank, and after ac- 
ceptance is eligible for rediscount by a Federal re- 
serve bank. 

(Opinion of Counsel, Federal Reserve Bulletin, August, 
1919, page 740.) 

A draft drawn by a cooperative marketing asso- Acceptances for 
ciation against negotiable warehouse receipts cover- SsSaSms 
ing nonperishable agricultural commodities to which 
the association has title and which are stored in inde- 
pendent warehouses is eligible for rediscount after 
acceptance, provided it complies in all respects with 
the regulations. 

(Ruling, Federal Reserve Bulletin, August, 1921, page 963.) 

Acceptances of an acceptance corporation ought Paper of 
to be dealt with exactly as would be the acceptances coJpSon 
of a prime private banker. These acceptance cor- 
porations are in the same relation to the Federal 
Reserve System as the private bankers. They can 
not become members, but, inasmuch as they expect 
to give full information about their own financial 
standing and the nature of their acceptances, and 
as they exercise a most important function for the 
further development of our acceptance business 
and discount market, their operation ought to be 
encouraged in every respect. 

(Ruling, Federal Reserve Bulletin, July, 1918, page 635.) 

Although the Federal reserve banks legally may Option to 
rediscount any draft which section 13 authorizes a rediscount 
member bank to accept, nevertheless such reserve 
banks are not required by law to rediscount every 
such acceptance tendered to them for that purpose, 
whether or not it is secured at the time it is pre- 
sented for rediscount. 

(Ruling, Federal Reserve Bulletin, March, 1919, page 253.) 



142 



Commercial Banking Practice 



Payment for 
acceptance 
at maturity 



The discount committee of the Federal Reserve 
Board has reported that, in its opinion, "Federal 
reserve banks should insist that acceptances when 
due should be paid by checks on the local Federal 
reserve bank, in order that they may be charged to 
the account of the acceptor on the day of maturity, 
or else that acceptances should be paid by checks 
through the clearings. If an arrangement on these 
lines can not be perfected, Federal reserve banks 
ought to be required to add one day to the actual 
number of days the acceptance has to run when 
bought, so as to make up for the loss of interest 
incurred in collecting in this manner." 

This report has been agreed to by the Board, and 
your bank is requested, in buying acceptances, to 
charge discount for one additional day, except in 
cases where satisfactory arrangements are made to 
make actual cash payment at the Federal reserve 
bank on the day of maturity. 

(Ruling, Federal Reserve Bulletin, June, 1918, page 521.) 

For additional opinions and rulings bearing on 
this subject, see Part I, "Bank Acceptances," pages 
11-19, 32-37, 43-51, 53-57, above. 



Acceptance! 
for dealers 
engaged in 
export and 
domestic 
sale 



INELIGIBLE BANK ACCEPTANCES 

Opinions and Rulings 

Acceptances drawn to finance the purchase or 
production of goods under contract for export will 
no longer be eligible for rediscount or purchase if 
the customer is given the option to furnish ware- 
house receipts or similar documents covering goods 
not intended for export, and thus to change the 
nature of the acceptance. 

(Ruling, Federal Reserve Bulletin, January, 1921, page 
71.) 



Rediscounts 143 

The acceptance of drafts secured by bills of lad- Use of . 

r «, proceeds ' 

ing for the primary purpose of providing the bor- 
rower with working capital during the period re- 
quired to manufacture and resell the goods covered 
by the bills of lading is an abuse of the domestic 
acceptance privilege, and Federal reserve banks 
should decline to rediscount or purchase accept- 
ances made for such purpose. 

(Ruling, Federal Reserve Bulletin, December, 1920, page 
1301.) 

The Board is of the opinion that a draft drawn Finance 

by a cotton factor, secured at the time of acceptance paper 

by a warehouse receipt covering cotton consigned to 

the cotton factor for the purpose of sale, where it 

appears that the proceeds are to be used by the 

factor not for a commercial purpose but rather for 

the purpose of lending to his customers, is not 

eligible for acceptance, and in consequence is not 

eligible for rediscount by a Federal reserve bank 

as an acceptance. 

(Ruling, Federal Reserve Bulletin, February, 1920, page 
162.) 

National banks are not authorized to accept bills Chattel 
secured by chattel mortgages on cattle, and Fed- ""urity 6 
eral reserve banks should consider as ineligible bills 
drawn against the security of such chattel mort- 
gages, whether accepted by member or nonmember 
banks. 

(Ruling, Federal Reserve Bulletin, April, 1918, page 309.) 

For additional opinions and rulings bearing on 
this subject, see Part I, "Bank Acceptances," pages 
11-19, 32-37, 43-51, 53-57, above. 



144 



Commercial Banking Practice 



Evidence 

furnished 

Federal 

reserve 

bank 



EVIDENCE OF ELIGIBILITY 
Regulations of Federal Reserve Board 

A Federal reserve bank must be satisfied, either 
by reference to the acceptance itself, or otherwise, 
that it is eligible for rediscount. The bill itself 
should be drawn so as to evidence the character of 
the underlying transactions, but if it is not so 
drawn, evidence of eligibility may consist of a stamp 
or certificate affixed by the acceptor in form satis- 
factory to the Federal reserve bank.* 

(Regulation A, Series of 1920, B.) 

* The following forms of the certificates referred to have 
been approved by the Federal Reserve Board and all Federal 
reserve banks: 



Underlying Transaction 


Form of Certificate 


Domestic Shipments : 


"At time of acceptance, this bill was 
accompanied by shipping documents 
evidencing the domestic shipment of 
(name of commodity) from (point of 
shipment) to (place of destination). 
(Name of Acceptor)" 


Import and Export 
Transactions : 


"This acceptance arises out of a transac- 
tioo involve {%£»; ('*(.-. 

of commodity) from (point of ship- 
ment) to (place of destination). 

(Name of Acceptor)" 


Warehouse Secured 
Credit: 


"This bill was secured at the time of 
acceptance by independent warehouse, 
terminal, or other similar receipt con- 
veying security title to (name of read- 
ily marketable staple) stored in (coun- 
try where stored) and the acceptor 
will remain secured throughout the life 
of the bill. (Name Qf Acceptor) » 



(Circular No. 355, Federal Reserve Bank of New York.) 
When drafts drawn for the purpose of furnishing dollar 
exchange are accepted, they are customarily stamped as 
follows: "This draft is accepted under authority of the 
Federal Reserve Board for the purpose of creating dollar 
exchange. (Name of Acceptor)" 



Rediscounts 145 

Opinions and Rulings 

The Federal reserve bank reserves the right to Requirement 
ask State member banks for evidence underlying eyidence 
the certification given to it, and the bank examiner 
may require evidence from the national bank. 
Member banks would, therefore, best protect them- 
selves by stipulating for themselves the right at 
times to ask for substantiation of the assurances 
given by their customers. 

(Ruling, Federal Reserve Bulletin, December, 1915, page 
406.) 

MATURITY 
Statutory Provisions 

Any Federal reserve bank may discount accept- Three months 
ances . . . which have a maturity at the time of 
discount of not more than three months' sight, ex- 
clusive of days of grace. 

(Federal Reserve Act, Section 13.) 

Regulations of Federal Reserve Board 

Although a Federal reserve bank may legally re- Maturity 
discount an acceptance having a maturity at the 
time of discount of not more than three months, ex- 
clusive of days of grace, it may decline to rediscount 
any acceptance the maturity of which is in excess customary 
of the usual or customary period of credit required p*" * 
to finance the underlying transaction or which is in 
excess of that period reasonably necessary to 
finance such transactions. Since the purpose of 
permitting the acceptance of drafts secured by 
warehouse receipts or other such documents is to 
permit of the temporary holding of readily market- 
able staples in storage pending a reasonably prompt 
sale, shipment, or distribution, no such acceptance 
should have a maturity in excess of the time ordi- 
narily necessary to effect a reasonably prompt sale, 



146 



Commercial Banking Practice 



Term 
of credit 
agreement 



Renewals 



shipment, or distribution into the process of manu- 
facture or consumption. 

While a national bank may properly enter into an 
agreement having more than six months to run by 
which it obligates itself to accept drafts of the kinds 
described in ... . [section 13*], each individual 
draft accepted under the terms of that agreement 
must, in order to be eligible, conform in all respects 
to the provisions of the law and these regulations. 
Inasmuch as each individual acceptance must itself 
conform to the terms of the law, no renewal draft, 
whether or not contracted for in advance, can be 
eligible if at the time of its acceptance the period 
required for the conclusion of the transaction out of 
which the original draft was drawn shall have 
elapsed. The question of the eligibility of renewal 
drafts, therefore, must necessarily depend upon the 
stage of the transaction at the time the renewal 
drafts are drawn. 

(Regulation A, Series of 1920, B.) 



Acceptances 
in excess 
of 10 
per cent. 



AMOUNT OF PAPER OF ONE INTEREST REDIS- 
COUNTABLE FOR ONE MEMBER BANK 

Regulations of the Federal Reserve Board 

In order to be eligible, acceptances for any one 
customer in excess of ten per cent, of the capital and 
surplus of the accepting bank must remain actually 
secured throughout the life of the acceptance. In 
the case of acceptances of member banks this secur- 
ity must consist of shipping documents, warehouse 
receipts or other such documents, or some other 
actual security growing out of the same transaction 
as the acceptance, such as documentary drafts, trade 
acceptances, terminal receipts, or trust receipts 



* For Section 13, see pages 9-10, above. 



Rediscounts 147 

which cover goods of such a character as to insure 
at all times a continuance of an effective and lawful 
lien in favor of the accepting bank. Other trust 
receipts are not secured within the meaning of this 
paragraph if they permit the customer to have ac- 
cess to or control over the goods. 
(Regulation A, Series of 1920, B.) 

See also "Rediscount of Promissory Notes," 
pages 97-103, above. 

INDORSEMENT 
Statutory Provisions 

Any Federal reserve bank may discount accept- Member bank 
ances . . . which are indorsed by at least one mem- In orsement 
ber bank. 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

If the acceptance is indorsed in blank it can of indorsement 
course change ownership from one holder to an- u,Wank 
other without being indorsed by each subsequent 
holder, and the title would pass. 

The Board expresses the hope that we may soon 
reach the point when Federal reserve banks can 
make a definite rule not to buy bankers' acceptances 
except such as bear three responsible signatures, 
being those of the acceptor, the drawer, and the 
indorser. 

(Ruling, Federal Reserve Bulletin, August, 1918, page 
744.) 

It appears that some national banks, in considera- Accommoda- 
tion of a fee or commission, are accustomed to in- m d n rsement 
dorse acceptances for the accommodation of their 
customers or bill brokers. Whether or not a na- 
tional bank has authority to indorse an acceptance 



148 Commercial Banking Practice 

for accommodation is a question of law which in the 
last analysis must be determined by the courts. The 
Federal Reserve Board is of the opinion that a na- 
tional bank has no authority to indorse an accept- 
ance for accommodation, and that such act is ultra 
vires. 

However, a national bank may purchase an ac- 
ceptance and immediately resell it with its indorse- 
ment, since the power to indorse acceptances is in- 
cidental to the power to negotiate acceptances. 
There appears to be no authority of law which per- 
mits a national bank to lend its credit by indorsing 
an acceptance where the transaction does not in- 
volve an actual transfer of title to and from the 
national bank. 

(Opinion of Counsel, Federal Reserve Bulletin, May, 1921, 
page 547.) 



For other provisions governing the rediscount of 
bank acceptances, see pages 103-106, above. 



PART III. 

Advances by 
Federal Reserve Banks 

General Statutory Provisions 

Any Federal reserve bank may make advances Maturity 
to its member banks on their promissory notes for 
a period not exceeding fifteen days at rates to be 
established by such Federal reserve banks, subject 
to the review and determination of the Federal Re- 
serve Board, provided such promissory notes are 
secured by such notes, drafts, bills of exchange, or Security 
bankers' acceptances as are eligible for rediscount 
or for purchase by Federal reserve banks under the lgl e paper 
provisions of this Act, or by the deposit or pledge United states 
of bonds or notes of the United States. obligations 

(Federal Reserve Act, Section 13.) 

The Federal reserve banks shall be authorized, War 
subject to the maturity limitations of the Federal Cor^ration 
Reserve Act and to regulations of the Federal Re- 
serve Board, to discount the direct obligations of 
member banks secured by . . . bonds of the [War 
Finance] Corporation . . . No discount or re- 
discount under this section shall be granted at a less 
interest charge than one per centum per annum 
above the prevailing rates for eligible commercial 
paper of corresponding maturity. 

(War Finance Corporation Act, Section 13.) 

General Regulations of Federal Reserve Board 

Any Federal reserve bank may make advances to 
its member banks on their promissory notes for a 



bonds 



150 



Commercial Banking Practice 



Security 



Indorsement 

of 

collateral 



Preferential 
rate; collateral 
of war 
bonds 



Discretion of 

reserve 

bank 



period not exceeding fifteen days, provided that they 
are secured by notes, drafts, bills of exchange, or 
bankers' acceptances which are eligible for redis- 
count or for purchase by Federal reserve banks, or 
by the deposit or pledge of bonds or notes of the 
United States, or bonds of the War Finance Cor- 
poration. 

(Regulation A, Series of 1920, A, I.) 

For conditions of ehgibility of notes, drafts, and 
acceptances, see pages 77-87, 113-118, 126-131, 
135-142, above, and 153-158, below. 

Security 
Opinions and Rulings 

Eligible paper pledged as security for a promis- 
sory note of a member bank on which an advance 
is being made by a Federal reserve bank need not 
be indorsed by such member bank if such eligible 
paper is already in negotiable form. 

(Opinion of Counsel, Federal Reserve Bulletin, December, 
1916, page 685.) 

The Federal Reserve Board may, under the terms 
of section 14 of the Federal Reserve Act, approve 
a preferential rate of discount upon member bank 
notes secured by certificates of indebtedness of the 
United States, by Liberty bonds, or by Victory 
notes. A Federal reserve bank, in the exercise of its 
discretion, may decline to make an advance upon 
such a note of a member bank unless the certificates 
of indebtedness, Liberty bonds, or Victory notes 
pledged as security are actually owned by the mem- 
ber bank and unless the Government deposit of such 
bank, if any, is secured by certificates of indebted- 
ness, Liberty bonds, or Victory notes actually 
owned by it. 

(Opinion of Counsel, Federal Reserve Bulletin, February, 
1920, page 163.) 



Advances by Federal Reserve Banks 151 

Member banks in procuring advances from Fed- Counl y 

r . ° warrants 

eral reserve banks on promissory notes must secure ineligible 
such notes by paper eligible for rediscount or for 
purchase by Federal reserve banks or by bonds or 
notes of the United States. County warrants are 
not eligible as security. 

(Opinion of Counsel, Federal Reserve Bulletin, November, 
1916, page 609.) 

Farm loan bonds are issued by Federal farm land Farm loan 
banks incorporated under Federal law, and are not ^SigiUe 
obligations of the United States, so that they are 
not eligible as collateral for promissory notes of 
member banks. 

(Opinion of Counsel, Federal Reserve Bulletin, January, 
1918, page 33.) 

Maturity 
Statutory Provisions 

Any Federal reserve bank may make advances to Fifteen days 
its member banks on their promissory notes for 
periods not exceeding fifteen days. 

(Federal Reserve Act, Section 13.) 

Opinions and Rulings 

If by reason of a State law paper falling due on Notes due on Sunday 
Saturday or Sunday must be collected one or two or ega hoiday 
days before its apparent maturity or one or two 
days thereafter, interest should be charged ac- 
cordingly. 

(Ruling, Federal Reserve Bulletin, February, 1918, page 
108.) 

A Federal reserve bank may properly renew the Rene £j|j 
fifteen-day notes of its member banks if properly se- 
cured, provided that the Federal reserve bank does 



152 Commercial Banking Practice 

not obligate itself in advance to make any such 
renewal. 

(Opinion of Counsel, Federal Reserve Bulletin, October, 
1917, page 765.) 

Renewals not While the Federal Reserve Board does not wish 

encouraged to pro hibit the renewal of fifteen-day notes, it feels 

that renewals should be the exception rather than 

the rule. 

(Ruling, Federal Reserve Bulletin, November, 1917, page 
879.) 



PART IV. 

Open Market Transactions 

General Statutory Provisions 

Any Federal reserve bank may, under rules and Cable 
regulations prescribed by the Federal Reserve acceptances, 
Board, purchase and sell in the open market, at andba,s 
home or abroad, either from or to domestic or for- 
eign banks, firms, corporations, or individuals, cable 
transfers and bankers' acceptances and bills of ex- 
change of the kinds and maturities by this Act made 
eligible for rediscount, with or without the indorse- 
ment of a member bank. 

Every Federal reserve bank shall have power Commercial 
... to purchase from member banks and to sell, bl s 
with or without its indorsement, bills of exchange 
arising out of commercial transactions, as herein- 
before defined. 

(Federal Reserve Act, Section 14.) 

Such drafts or bills [to provide dollar exchange] D " 3 * 
may be acquired by Federal reserve banks in such bills 
amounts and subject to such regulations, restric- 
tions, and limitations as may be prescribed by the 
Federal Reserve Board. 

(Federal Reserve Act, Section 13.) 

General Regulations and Rulings 
Regulations of Federal Reserve Board 

The Federal Reserve Board, exercising its statu- Conditions 
tory right to regulate the purchase of bills of SgaSKy 
exchange and acceptances, has determined that a 



154 



Commercial Banking Practic 



Prior 
acceptance 



Six months' 
foreign 
trade 
bills 



Goods under 
contract of 
sale 



bill of exchange or acceptance, to be eligible for 
purchase by Federal reserve banks under this pro- 
vision of section 14, must have been accepted by 
the drawee prior to such purchase unless it is either 
accompanied or secured by shipping documents or 
by warehouse, terminal, or other similar receipt 
conveying security title or bears a satisfactory bank- 
ing indorsement, and must conform to the relative 
requirements of Regulation A,* except that — 

(a) A banker's acceptance growing out of a 
transaction involving the importation or exporta- 
tion of goods may be purchased if it has a maturity 
not in excess of six months, exclusive of days of 
grace, provided that it conforms in other respects 
to the relative requirements of Regulation A,* and 

(b) A banker's acceptance growing out of a 
transaction involving the storage within the United 
States of goods actually under contract for sale and 
not yet delivered or paid for may be purchased, 
provided that the acceptor is secured by the pledge 
of such goods; and provided further that the ac- 
ceptance conforms in other respects to the relative 
requirements of Regulation A.* 

(Regulation B, Series of 1921, II.) 



Purpose 
of new 
regulation 



Announcements of Federal Reserve Board 

The new regulation is issued primarily for the 
purpose of permitting Federal reserve banks until 
further notice to purchase in the open market bank- 
ers' acceptances with maturities not in excess of six 
months, which grow out of transactions involving 
the importation or exportation of goods. 



* For requirements with respect to bills of exchange and 
trade acceptances, see pages 107-121, above; with respect to 
bank acceptances, see pages 134-146, above. 



Open Market Transactions 155 

Two considerations have led the Board to take 
this action: (1) The desire to widen the accep- m£ e k p e t t ance 
tance market by meeting the wants of savings banks 
and similar purchasers of bankers' acceptances who 
are now deterred from investing in acceptances of 
longer than three months' maturity, because of the 
lack of authority of Federal reserve banks to pur- 
chase longer maturities up to six months; (2) to Foreign 
provide more ample facilities for financing import trade 
and export trade with countries where either normal 
conditions or present abnormal conditions indicate 
the desirability of rendering assistance by making 
acceptances of maturities not exceeding six months 
eligible for purchase by Federal reserve banks. 
While the Federal reserve banks would, under or- 
dinary conditions, prefer to confine their invest- 
ments to paper of short maturity, that is, not ex- 
ceeding three months, it is believed that the present 
emergency in the foreign trade situation would be 
relieved by a more liberal practice. Vigilant care, 
however, should be exercised by Federal reserve 
banks in purchasing acceptances of long maturities, 
in order that the liquidity of the aggregate invest- 
ment in acceptances held by them should not be 
affected. In amending its regulation in the manner 
described, the Board looks to the good banking 
judgment and discretion of the accepting banks and 
of the Federal reserve banks to avoid any un- 
toward results. To avoid misunderstanding, the 
Board desires to add that the results of this widen- 
ing of the investment powers of the Federal reserve 
banks will be followed closely, with a view to such 
modification of its rules or amendment of its regu- 
lations as future developments may indicate to be 
necessary. 



156 



Commercial Banking Practice 



Acceptances 

against 

goods 



Promissory 

notes 

excluded 



Eligible paper 



Discretion of 



reserve 
banks 



The Board has also taken this occasion to make 
another slight amendment to Regulation B so that 
its terms will more clearly indicate the Board's pur- 
pose in permitting Federal reserve banks to pur- 
chase in the open market bankers' acceptances grow- 
ing out of the domestic storage of goods other than 
readily marketable staples. 

(Announcement, Federal Reserve Bulletin, May, 1921, page 
545.) 

Opinions and Rulings 

The original bill for the establishment of Federal 
reserve banks permitted the purchase in the open 
market of "notes, drafts, and bills of exchange," 
but in the bill as finally enacted the words "notes 
and drafts" were stricken out in section 14, al- 
though they are retained in section 13. The Board 
has reached the conclusion, in which it is sustained 
by opinion of counsel, that Congress drew a dis- 
tinction in sections 13 and 14 between the several 
forms of commercial paper, and that promissory 
notes, even though bearing an additional indorse- 
ment, must be regarded as excluded from open mar- 
ket purchases under section 14. 

There remain, then, as eligible for purchase under 
this section, "cable transfers" and "bills of ex- 
change" of two kinds: (1) so-called foreign bills 
of exchange; and (2) domestic acceptances drawn 
by one party on another, as by a seller of goods 
upon the purchaser, such as have been classified by 
the Board as trade acceptances either accepted or 
not accepted at the time of purchase. 

The decision whether Federal reserve banks 
should engage in such open market operations rests 
entirely with them and not with the Federal Reserve 
Board. 



Open Market Transactions 157 

Any Federal reserve bank may, under the pro- Promissory notes 
visions of section 14 of the Federal Reserve Act, 
purchase acceptances and bills of exchange of cer- 
tain kinds and maturities in the open market; but 
promissory notes as distinguished from bills of ex- 
change, whether one or more names, are not eligible 
for such purchase. 

(Opinion of Counsel, Federal Reserve Bulletin, November, 
1915, page 365.) 

The purchase of commodity loans from member Commodity paper 
banks without their indorsement would not come 
within the provisions of the law unless there is two- 
name commodity paper or such paper can be 
created in connection with commodity loans. 

(Ruling, Federal Reserve Bulletin, December, 1915, page 
406.) 

Eligible Bills and Acceptances 

Opinions and Rulings 

Gold bars may be properly considered as goods, Bullion 
and accordingly sixty-day bills when accepted by 
banks and bankers against such shipment would be 
eligible for purchase by Federal reserve banks as 
based upon or involving the exportation of goods. 

(Ruling, Federal Reserve Bulletin, January, 1917, page 
29.) 

Gold coin is "goods" within the meaning of sec- Com 
tion 13 of the Federal Reserve Act ; and, therefore, 
a bill of exchange drawn to finance a shipment of 
gold coin from this country is eligible for purchase 
by a Federal reserve bank if otherwise in conform- 
ity with the provisions of the law and the regulations 
of the Federal Reserve Board. 

(Ruling, Federal Reserve Bulletin, January, 1917, page 
29.) 



shipments 



shipments 



158 Commercial Banking Practice 

^Jjjp ed The Board is of the opinion that acceptances 

to foreign drawn against commodities shipped to foreign coun- 

tries, to be held on consignment by the shippers' 
agents until sales have been effected are technically 
eligible for purchase in the open market, provided 
that the goods are actually shipped for export and 
shipping documents covering such goods are at- 
tached to the draft at the time it is presented for 
acceptance, and provided that in other respects the 
drafts comply with the law and the Board's regu- 
lations governing open-market operations. 

Although such acceptances are technically eligi- 
ble for purchase, the Federal reserve bank, before 
purchasing the acceptances, should be reasonably 
sure that the goods will be sold before the maturity 
of such acceptances, for the use of acceptances is 
proper only where it is anticipated at the time the 
acceptances are drawn that they will be liquidated 
out of the proceeds derived from the sale of the 
goods under the acceptance. 

(Ruling, Federal Reserve Bulletin, April, 1921, page 419.) 

For additional rulings, see Part II, "Rediscounts 
with Federal Reserve Bank," pages 113-118 and 
135-142, above. 

Ineligible Bills and Acceptances 
Opinions and Rulings 

Acceptances Acceptances drawn by a manufacturer on and 

on arfes and accepted by a trust company not a member of the 

not secured Federal Reserve System, the proceeds of which are 

to be used for purchases of raw material and pay- 
ment for labor where the goods had not been sold 
and no warehouse receipts or other instruments 



Open Market Transactions 159 

could be furnished, are held not to be eligible for 
purchase by a Federal reserve bank. 

(Ruling, Federal Reserve Bulletin, February, 1916, page 
65.) 

A banker's acceptance drawn for the purpose of Acceptances 
purchasing goods secured by a bill of sale of stock Sioifsai/ 
in hand is not eligible for purchase by Federal re- 
serve banks. 

(Opinion of Counsel, Federal Reserve Bulletin, December, 
1916, page 684.) 

The fact that a land company has stamped a bill stamp 'Trade 

x . J x Acceptance 

a trade acceptance and has signed such statement has no value 
as "acceptor" does not in itself make it a trade ac- 
ceptance. The bill was accepted by a bank and 
not by the land company and is therefore not eligi- 
ble for purchase as a trade acceptance. 

(Ruling, Federal Reserve Bulletin, March, 1916, page 112.) 

An instrument in the form of a bill of exchange, Draft 
drawn by an agent of a corporation upon the cor 
poration itself, is not a bill of exchange such as is by 'agent 
eligible for purchase in the open market by Federal 
reserve banks. 

(Opinion of Counsel, Federal Reserve Bulletin, September, 
1916, page 462.) 

For additional rulings, see Part II, "Rediscounts 
with Federal Reserve Banks," pages 118-120 and 
142-143, above. 

Requirement of Statements 
Regulations of Federal Reserve Board 

A bill of exchange, unless indorsed by a member Bills of 
bank, is not eligible for purchase until a satisfac- exchan s e 
tory statement has been furnished of the financial 
condition of one or more of the parties thereto. 



drawn on 
corporation 



160 



Commercial Banking Practice 



Bank 
acceptances 



A banker's acceptance, unless accepted or in- 
dorsed by a member bank, is not eligible for pur- 
chase until the acceptor has furnished a satisfactory 
statement of its financial condition in form to be 
approved by the Federal reserve bank and has 
agreed in writing with a Federal reserve bank to 
inform it upon request concerning the transaction 
underlying the acceptance. 

(Regulation B, Series of 1921, III.) 



Maturity 
as for 
rediscounts 



Exceptk 



Maturity 
Statutory Provisions 

Any Federal reserve bank may . . . purchase 
and sell . . . cable transfers and bankers' accept- 
ances and bills of exchange of the kinds and ma- 
turies by this Act made eligible for rediscount. 

Every Federal reserve bank shall have power 
... to purchase from member banks and to 
sell . . . bills of exchange arising out of com- 
mercial transactions. 

(Federal Reserve Act, Section 14.) 

Regulations of Federal Reserve Board 

The Federal Reserve Board, exercising its statu- 
tory right to regulate the purchase of bills of 
exchange and acceptances, has determined that a 
bill of exchange or acceptance, to be eligible for 
purchase by Federal reserve banks . . . must con- 
form to the relative requirements of Regulation 
A,* except that — 

A banker's acceptance growing out of a trans- 
action involving the importation or exportation of 



*See Part II, "Rediscounts with Federal Reserve Banks, 
pages 121 and 145-146, above. 



Open Market Transactions 161 

goods may be purchased if it has a maturity not in 
excess of six months, exclusive of days of grace. 

(Regulation B, Series of 1921, II.) 

Indorsement 
Statutory Provisions 

Any Federal reserve bank may . . . purchase 
and sell . . . cable transfers and bankers' accept- 
ances and bills of exchange . . . with or without 
the indorsement of a member bank. 

Every Federal reserve bank shall have power 
.... to purchase from member banks and to 
sell .... bills of exchange arising out of com- 
mercial transactions. 

(Federal Reserve Act, Section 14.) 

Opinions and Rulings 

It appears that some national banks, in con- Accommodation 
sideration of a fee or commission, are accustomed 
to indorse acceptances for the accommodation of 
their customers or bill brokers. Whether or not a 
national bank has authority to indorse an accept- 
ance for accommodation is a question of law which 
in the last analysis must be determined by the 
courts. The Federal Reserve Board is of the 
opinion that a national bank has no authority to 
indorse an acceptance for accommodation, and that 
such act is ultra vires. 

However, a national bank may purchase an ac- 
ceptance and immediately resell it with its indorse- 
ment, since the power to indorse acceptances is 
incidental to the power to negotiate acceptances. 
There appears to be no authority of law which per- 
mits a national bank to lend its credit by indorsing 



indorsement 



1G2 



Commercial Banking Practic 



Purchase 

from 

acceptor 



Use of 
commercial 
paper rate 



an acceptance where the transaction does not in- 
volve an actual transfer of title to and from the 
national bank. 

(Opinion of Counsel, Federal Reserve Bulletin, May, 1921, 
page 547.) 

A Federal reserve bank technically has author- 
ity to purchase from the drawer, or even from the 
accepting bank, a banker's acceptance which bears 
no indorsement other than that of the accepting 
bank. 

The normal and desirable practice, however, is 
for the drawer to discount acceptances with some 
bank other than the accepting bank, rather than 
for the accepting bank to discount the acceptances. 
In view, however, of the fact that the acceptance 
business is comparatively new in this country, and 
in view of the consequent lack of an adequate open 
market for bankers' acceptances in some districts, 
it has seemed best for some of the Federal reserve 
banks to purchase acceptances direct from the ac- 
cepting banks, in the hope that the proper use of, 
and an active market for, bankers' acceptances may 
thereby be encouraged. 

It is, nevertheless, apparent that the indorsement 
of the accepting bank adds no strength to the in- 
strument, since the accepting bank is already liable, 
primarily, as acceptor, and the Federal Reserve 
Board in February, 1920, instructed Federal re- 
serve banks that all purchases direct from the 
accepting bank of bankers' acceptances bearing no 
member bank indorsement other than that of the 
accepting bank should be made at the prevailing 
rate for commercial paper rather than at the 
preferential rate applicable to bankers' acceptances 
as such. 



Open Market Transactions 163 

The ten per cent, limitation on the discount of Discretion of 
paper of any one borrower for any member bank ["apply 
does not apply to open market purchases. In view jL° P er cent - 
of the fact that an acceptance indorsed only by the 
accepting bank is supported by the credit of only 
two parties, and in this respect is like a customer's 
note indorsed by the bank, the Federal Reserve 
Board feels that a Federal reserve bank is justified 
in limiting its open-market purchases of bankers' 
acceptances of this character, so that it will at no 
time hold under rediscount or purchase from one 
member bank an aggregate amount in excess of ten 
per cent, of the member bank's capital and surplus 
of ( 1 ) notes, drafts, and bills bearing the signature 
or indorsement of any one borrower, and (2) bank- 
ers' acceptances made by the member bank for the 
same borrower, but bearing no indorsement other 
than that of the accepting bank. The Board has, 
however, issued no ruling upon this point, and for 
the time being at least is willing to leave the matter 
to the sound banking discretion of the officers of the 
Federal reserve banks. 

(Ruling, Federal Reserve Bulletin, June, 1921, page 699.) 



APPENDIX: 

Acceptance Powers of International Financial 
Corporations 

ACCEPTANCES OF FEDERAL CORPORATIONS 
Statutory Provisions 

Each corporation so organized [for the purpose 
of engaging in international or foreign banking or 
other international or foreign financial operations, 
or in banking or other financial operations in a 
dependency or insular possession of the United 
States] shall have power, under such rules and 
regulations as the Federal Reserve Board may 
prescribe ... to accept bills or drafts drawn upon Acceptances 
it subject to such limitations and restrictions as the 
Federal Reserve Board may impose; to issue letters 
of credit; . . . and generally to exercise such other 
powers as are incidental to the powers conferred pow 
by this Act or as may be usual, in the determina- 
tion of the Federal Reserve Board, in connection 
with the transaction of the business of banking or 
other financial operations in the countries, colonies, 
dependencies, or possessions in which it shall trans- 
act business and not inconsistent with the powers 
specifically granted herein. Nothing contained in this 
section shall be construed to prohibit the Federal 
Reserve Board, under its power to prescribe rules 
and regulations, from limiting the aggregate 
amount of liabilities of any or all classes incurred 
by the corporation and outstanding at any one 
time. 

(Federal Reserve Act, Section 25 (a).) 



166 Commercial Banking Practice 

Regulations of Federal Reserve Board 

Kinds Any Corporation may accept ( 1 ) drafts and bills 

of exchange drawn upon it which grow out of 
transactions involving the importation or exporta- 
tion of goods, and (2) drafts and bills of exchange 
which are drawn by banks or bankers located in for- 
eign countries or dependencies or insular posses- 
sions of the United States for the purpose of fur- 
nishing dollar exchange as required by the usages 
of trade in such countries, dependencies, and pos- 
sessions, provided, however, that, except with the 
approval of the Federal Reserve Board and subject 
to such limitations as it may prescribe, no Corpora- 
tion shall exercise its power to accept drafts or bills 
of exchange if at the time such drafts or bills are 
presented for acceptance it has outstanding any 
debentures, bonds, notes, or other such obligations 
issued by it. 

Maturity Except with the approval of the Federal Re- 

serve Board, no Corporation shall accept any draft 
or bill of exchange which grows out of a transac- 
tion involving the importation or exportation of 
goods with a maturity in excess of six months, or 
shall accept any draft or bill of exchange drawn 
for the purpose of furnishing dollar exchange with 
a maturity in excess of three months. 

Limitation, (l) Individual drawers: No acceptances shall 

be made for the account of any one drawer in an 
amount aggregating at any time in excess of ten 
per cent, of the subscribed capital and surplus of 
the Corporation, unless the transaction be fully se- 
cured or represents an exportation or importation 
of commodities and is guaranteed by a bank or 
banker of undoubted solvency. (2) Aggregates: 
Whenever the aggregate of acceptances outstand- 



Appendix 167 

ing at any time (a) exceeds the amount of the sub- 
scribed capital and surplus, fifty per cent, of all the 
acceptances in excess of the amount shall be fully 
secured; or (b) exceeds twice the amount of the 
subscribed capital and surplus, all the acceptances 
outstanding in excess of such amount shall be fully 
secured. (The Corporation shall elect whichever 
requirement (a) or (b) calls for the smaller amount 
of secured acceptances.) In no event shall any 
Corporation have outstanding at any one time ac- 
ceptances drawn for the purpose of furnishing dol- 
lar exchange in an amount aggregating more than 
fifty per cent, of its subscribed capital and surplus. 

Against all acceptances outstanding which ma- Reserves 
ture in thirty days or less a reserve of at least fifteen 
per cent, shall be maintained, and against all ac- 
ceptances outstanding which mature in more than 
thirty days a reserve of at least three per cent, shall 
be maintained. Reserves against acceptances must be 
in liquid assets of any or all of the following kinds : 
(1) cash; (2) balances with other banks ; (3) bank- 
ers' acceptances; and (4) such securities as the 
Federal Reserve Board may from time to time 
permit. 

(Regulation K, Series of 1920, XIII.) 

The total liabilities to a Corporation of any per- UabHities 
son, company, firm, or corporation for money bor- J °ower 
rowed, including in the liabilities of a company or 
firm the liabilities of the several members thereof, 
shall at no time exceed ten per cent, of the amount 
of its subscribed capital and surplus, except with 
the approval of the Federal Reserve Board: Pro- 
vided, however, That the discount of bills of ex- 
change drawn in good faith against actually exist- 
ing values and the discount of commercial or 



168 Commercial Banking Practice 

business paper actually owned by the person 
negotiating the same shall not be considered as 
money borrowed within the meaning of this para- 
graph. The liability of a customer on account of 
an acceptance made by the Corporation for his ac- 
count is not a liability for money borrowed within 
the meaning of this paragraph unless and until he 
fails to place the Corporation in funds to cover the 
payment of the acceptance at maturity or unless 
the Corporation itself holds the acceptance. 
Aggregate The aggregate of the Corporation's liabilities 

outstanding on account of acceptances, average 
domestic and foreign deposits, debentures, bonds, 
notes, guaranties, indorsements, and other such ob- 
ligations shall not exceed at any one time ten times 
the amount of the Corporation's subscribed capital 
and surplus except with the approval of the Federal 
Reserve Board. In determining the amount of the 
liabilities within the meaning of this paragraph, 
indorsements of bills of exchange having not more 
than six months to run, drawn and accepted by 
others than the Corporation, shall not be included. 

(Regulation K, Series of 1920, XV.) 

ACCEPTANCES OF STATE CORPORATIONS 
Statutory Provisions 

Regulation Before any national bank shall be permitted to 

purchase stock in any such corporation [chartered 
or incorporated under the laws of any state and 
principally engaged in international or foreign 
banking, or banking in a dependency or insular 
possession of the United States] the said corpora- 
tion shall enter into an agreement or undertaking 
with the Federal Reserve Board to restrict its ope- 
rations or conduct its business in such manner or 



Appendix 

under such limitations and restrictions as the said 
board may prescribe for the place or places wherein 
such business is to be conducted. 
(Federal Reserve Act, Section 25.) 

Regulations of Federal Reserve Board 

The Board has concluded that you should be per- Conditions as 
mitted to accept drafts and bills of exchange upon [,u^ n C e S p s tance 
the same terms and subject to the same conditions, 
limitations and restrictions as are prescribed in 
Paragraph XIII of the Board's Regulation K, 
Series of 1920, with reference to the exercise of the 
acceptance powers of foreign banking corporations 
organized under the terms of Section 25(a) of the 
Federal Reserve Act.* 

(Form of agreement of foreign banking corporation as a 
condition precedent to the purchase of their stock by national 
banks, B. 1, effective February 23, 1921.) 

Opinions and Rulings 

Acceptances of state foreign banking corpora- Exemption 
tions which have agreed with the Federal Reserve 
Board to limit acceptances for account of any one 
drawer to ten per cent, of the accepting bank's 
capital and surplus, unless the transaction be fully 
secured, are not subject to the ten per cent, limita- 
tion where the acceptor is secured by the acceptance 
of the foreign buyer after the release of the docu- 
ments. 

(Ruling, Federal Reserve Bulletin, October, 1920, page 
1065.) 

* See above, page 165. 



from 

10 per cent. 



INDEX 

PAGES 

Acceptance agreements, duration of 19-20, 38, 146 

Acceptance before sale or delivery 122 

Acceptance corporations: 

Notes of, ineligible for rediscount 89 

Rediscount of acceptances of 141 

Acceptance denned 7 

Acceptance powers of international financial corporations 165-169 

See also International financial corporations, acceptance powers of 
Acceptances, bank, see Bank acceptances 
Acceptances, trade, see Trade acceptances 

Acceptances without documents 122 

Actually existing value: 

Evidence of 123 

What constitutes 66, 121-123 

Advances by Federal reserve banks 149-152 

Eligibility of notes, drafts, etc 150 

Indorsement of collateral 150 

Maturity 151-152 

Renewals of member bank's notes 151-152 

Security for advances 150-151 

Sunday or legal holiday, notes due on 151 

Advertising space, trade acceptances based on 117-118 

Agricultural and commercial paper distinguished 79, 126 

Agricultural paper, rediscount of 125-133 

See also Rediscount of, Agricultural paper 

Automobile parts, acceptances covering importation of 20-21 

Automobiles and tires, acceptances based on domestic shipment of... 34 

Bank acceptance defined 7, 134 

Bank acceptances: 

Based on domestic shipments of goods 32-42 

Aggregate amount bank may accept 39-42 

Amount bank may accept for one interest 39 

Character of transactions 32-37 

Eligibility not dependent on security alone 32, 34 

Maturity 38-39 

Purchase of bank's own acceptance 41, 67-68 

Release of documents against acceptance 36-37, 135-137 

Renewal notes, acceptance of 38 

Shipment without sale 35, 39 

Shipping documents 35-36 

U. S. Revised Statutes, section 5202, not applicable 41 

Based on imports and exports 11-31 

Acceptance agreements having more than six months to run . . 19-20 

Acceptance at instance of exporter 15 

Acceptance prior to purchase or sale 16-18 

Acceptance secured bv documentary drafts 16 

Acceptances in additi< n to loans 27 

Aggregate amount bank may accept 28-31 

Amount bank may accept for one interest 21-28 

Character of 11-19 

Coin and bullion, acceptances against 19 

Dealers in same goods for export and domestic sale 18 

Drafts against collateral of acceptances 15-16 



172 Index 

PAGES 

Bank acceptances — continued 

Based on imports and exports — continued 

Exemption from ten per cent, limit 23-28 

Export contract not fulfilled 17 

Foreign correspondents, acceptances of, under guarantee 22-23,29 

Good faith a test 11 

Identification of specific goods no 1 ; required 11 

Importers' purchase money drafts 13 

Maturity 19-21 

Open accounts, acceptances against 15 

Permission to accept to «* mount of capital and surplus, appli- 
cation for ". 28-29 

Proof of assurances as to character 11, 13 

Purchase of bank's own acceptances 27, 30, 67-68 

Renewal of acceptances 20-21 

Secured bills exempt from ten per cent, limit 23 

Security, what constitutes actual 25-27 

Transaction must itself involve import or export 13-16 

U. S. Revised Statutes, section 5200, relation to acceptances . . 27-28 

U. S. Revised Statutes, section 5202, limitations of 30 

Coverture of 8 

Eligibility of bills for acceptance in relation to eligibility for 

rediscount 8 

Executed to furnish dollar exchange 53-58 

Aggregate amount bank may accept 58 

Amount bank may accept for one interest 57-58 

Application for permission to accept 53, 55, 57 

Character 53-57 

Countries whose trade usages warrant such acceptances 56 

Maturity 57 

U. S. Revised Statutes, section 5202, not applicable 58 

Investment in, by national banks , 64-68 

Acceptances as commercial or business paper 66 

Actually existing value, what constitutes 66 

Bills discounted before acceptance 66 

Bills of exchange include bank acceptances 65 

Indorsement for accommodation 67 

Purchase of bank's own acceptances 67-68 

Rediscounted paper not limited by section 5200 67, 68 

Reissuance of acceptances 68 

Issued for correspondents 59-63 

Agency agreement 60-63 

Guarantee of letters of credit by national banks 59 

Liabilities of principal and agent 62 

Rediscount of 134-148 

See also Rediscount of, Bank acceptances 

Secured by warehouse receipts 4S-52 

Aggregate amount bank may accept 52 

Amount bank may accept for one interest 52 

Bill of sale not eligible security 50 

Character of transactions 43-51 

Control of warehouse by acceptor 47 

Eligible security 45-49 

Foreign warehouses 46 

Ineligible security 49-51 

Maturity 51-52 

Readily marketable staples 43, 45 

Release of warehouse receipts 135-137 



Index 173 

PAGES 

Bank acceptances — continued 

Secured by warehouse receipts — continued 

Renewals 51 

Security not specified 51 

Speculative storage 49 

Substitution of warehouse receipts 51 

Warehouse receipts: 

Issued by independent warehouses 46 

Issued by lessee 47 

Use of 8 

Bill of exchange, definition of . 107 

Bill of sale, not eligible as security for bank acceptance 50, 159 

Bills eligible for rediscount, acceptance of 8, 134-148, 153-163 

Bills of exchange: 

Include bank acceptances 65 

NegotiabiHty 109-111 

Presentment for acceptance 107 

Rediscount of 107-124 

See also Rediscount of, Drafts and trade acceptances 
See also Open market transactions 

Building operations, eligibility for rediscount of acceptances based on 116 

Bullion, acceptances against 19 

Bullion shipments, acceptances against, eligible for open market pur- 
chases 157 

Capital requirements, drafts to finance 119 

Cattle: 

Acceptances based on shipment of 35, 140 

Notes for dairy, eligible for rediscount as agricultural paper 127 

Chattel mortgages: 

Bank acceptances against 50, 143 

Promissory notes secured by, ineligible for rediscount as agricul- 
tural paper 132 

Security for agricultural paper 127, 128, 132 

Cold storage companies: 

Notes of, ineligible for rediscount 90 

Rediscount of paper owned by 83 

Collateral notes, eligibility of, for rediscount 76, 78, 84-85, 90 

Collateral of acceptances 15-16, 89 

Collection charges, bills payable with 91, 110 

Commercial and agricultural paper distinguished 79, 126 

Commercial paper, bank acceptances as 66 

Commodity paper, eligibility of, for open market purchase 157 

Conditional sales as basis of trade acceptance 113 

Consignment of goods, purchase of acceptance against 158 

Cooperative marketing associations: 

Acceptances of, as agricultural paper 131 

Drafts drawn by 49, 141 

Cotton broker, rediscount of paper of 100 

Cotton factors: 

Acceptance of drafts drawn by 49 

Acceptances of, eligible for rediscount 117 

Rediscount of paper of 81-82, 90, 143 

Cotton-mill paper, rediscount of 93 

County warrants not eligible as collateral for advances 151 

Coverture of bank acceptances 8 



174 Index 



Definitions : 

Acceptance 7 

Agricultural paper 125 

Bank acceptance 7, 134 

Bill of exchange 107 

Draft 107 

Goods 19, 114 

Promissory note 77, 78 

Readily marketable staples 43, 45 

Trade acceptance 7, 111 

Demand notes and drafts ineligible for rediscount 95 

Demand, notice, and protest, waiver of 107, 109 

Dollar exchange 53-58 

See also Bank acceptances, Executed to furnish dollar exchange 

Dollar exchange drafts, rediscount of 137 

Domestic shipments, bank acceptances based on 32-42 

See also Bank acceptances, Based on domestic shipments 

Domicile bills 118 

Drafts: 

Accepted by foreign correspondents under guarantee 22,29 

Against collateral of acceptances 15-16 

Defined 107 

Discounted before acceptance 122 

Rediscount of 107-124 

See also Rediscount of, Drafts and trade acceptances 

Drawee, negotiability of bill made payable to order of 110 

Electrical installation, drafts based on, as trade acceptances 116 

Eligibility for acceptance in relation to eligibility for rediscount 8 

Eligibility for rediscount 

See under Rediscount of appropriate class of paper 

Equity exchanges, rediscount of paper of 83 

Extension of time, note or draft 96 

Farm loan bonds not eligible as collateral for advances 151 

Farm tools and equipment, eligibility for rediscount of notes for 128-129 

Federal reserve banks: 

Loans to individuals not made 80 

Rediscounts with . 69-148 

See also Rediscounts with Federal reserve banks 

Fertilizer, farmers note for, as agricultural paper 127 

Finance paper ineligible for rediscount 75-76, 88-90, 119, 143 

Fixed investments, notes for, ineligible for rediscount. .. .87, 91, 119, 132-133 

Food products, rediscount of notes secured by 85 

Foreign correspondents, drafts accepted by, under guarantee of na- 
tional bank 22, 29 

Foreign transactions as basis for trade acceptances 112 

Gas, acceptances based on sale and delivery of, eligible for rediscount. . 115 

Gold coin, acceptances against 19 

Gold coin shipments, acceptances against, eligible for open market 

purchases 157 

Goods defined 19, 114 

Holidays, notes due on legal 151 

Implement dealers, notes of 125 

Importers' purchase money drafts 13 



Index 175 



Imports and exports, bank acceptances based on 11-31 

See also Bank acceptances, Based on imports and exports 

Imports on docks, renewals against 21 

Indorsement 104, 106, 139, 147-148, 150, 161-163 

Indorsement for accommodation 67, 147, 161 

Insolvent bank, rediscount for, when reopened 85 

Installment plan sales, acceptance before delivery on 116 

Insurance premiums, drafts in payment of 113 

International financial corporations, acceptance powers of 165-169 

Federal corporations 165-168 

Amount corporation may accept 166-168 

Eligible drafts and bills of exchange 166 

Liabilities of one borrower 167-16S 

Maturity of acceptances 166 

Reserves against outstanding acceptances 167 

State corporations 168-169 

Investment in bank acceptances by national banks 64-68 

See also Bank acceptances, Investment in 
Irrigation company: 

Farmer's note to, as agricultural paper 130 

Eligibility for rediscount of paper of 81, 130, 132 

Land banks, notes of, ineligible for rediscount 88 

Letters of credit: 

Duration of 19-20, 38, 146 

Guarantee of, by national banks 59-60 

Limitations on amount bank may issue 30-31, 41-42 

Letters of credit and acceptances issued for correspondents 59-63 

See also Bank acceptances, Issued for correspondents 

Liberty bonds, see U. S. obligations 

Limitations : 

Acceptances for one interest, see under appropriate class of paper 
Aggregate amount bank may accept, see under appropriate class 
of paper 

Agricultural paper rediscountable by member bank 133 

Bank's liabilities, see U. S. Revised Statutes, section 5202 
Loans to one borrower, see U. S. Revised Statutes, section 5200 
Rediscount of paper of one maker or indorser 97, 103, 121-123, 147 

Live stock paper included in agricultural paper 125 

Loans to individuals, Federal reserve banks do not make 80 

Loans to ten per cent, limit: 

Bank acceptances in addition to 27 

See also U. S. Revised Statutes, section 5200 

Maturity, see under appropriate class of paper 

Minerals, unmined, not regarded as quick assets 94 

Mortgages, see Chattel mortgages and Collateral notes 

Motor trucks, rediscount of notes based on purchase of 82, 91 

Nonmember banks, rediscount for 87, 104-106 

Notes, promissory, see Promissory notes 

Oil, acceptances based on shipment of 34 

Open accounts: 

Acceptances in liquidation of 117, 122 

Assignment of, ineligible for rediscount 92 

Bank acceptances against 15 



176 Index 

PAGES 

Open market transactions 153-163 

Commodity paper, eligibility of 157 

Eligible paper * 157-158 

Indorsement 161-163 

Ineligible bills and acceptances 158-159 

Maturity 160 

Promissory notes excluded 156-157 

Purchase from acceptor 162 

Purchase of acceptances against goods stored 156 

Purchase of acceptances based on foreign trade 154 

Requirement of statements 159-160 

Ten per cent, limit does not apply 163 

Packing company, note of, ineligible for rediscount as agricultural 

paper 131 

Pig iron, rediscount of notes secured by 85 

Place of payment of trade acceptance Ill 

Preferential rates 150 

Promissory notes: 

Advances by Federal reserve banks on 149-152 

See also Advances by Federal reserve banks 

Ineligible for purchase in open market 156-157 

Rediscount of 77-106 

See also Rediscount of, Promissory notes 
Purchase of bank acceptances: 

By member banks 64-68 

See also Bank acceptances, Investment in, by national banks 

By reserve banks 153-163 

See also Open market transactions 

Railroad supplies, rediscount of acceptances based on sale of 115 

Rediscount for insolvent bank when reopened 85 

Rediscount of: 

Agricultural paper 125-133 

Amount rediscountable by a Federal reserve bank 133 

Chattel mortgages 127, 128, 132 

Definition of agricultural paper 125 

Discount may be by either maker or indorser 129 

Eligible agricultural paper 126-131 

Identification of agricultural paper 131 

Ineligible agricultural paper 131-133 

Payable to bank 130 

Bank acceptances 134-148 

Acceptance corporation, acceptances of 141 

Amount rediscountable for one member bank 146-147 

Chattel mortgages not eligible security 143 

Definition of bank acceptance 134 

Eligible acceptors 134 

Eligible bank acceptances 135-142 

Evidence of eligibility 144-145 

Exchange in import transactions 138 

Indorsement 139, 147-148 

Ineligible bank acceptances 142-143 

Maturity 145-146 

Negotiability, conditions of 134-135 

Option to rediscount 141 

Payment at maturity 142 



Index 177 

PAGES 

Rediscount of — continued 

Bank acceptances — continued 

Renewals 146 

Shipping documents to be furnished 137 

Warehouse receipts as security 140 

Drafts and trade acceptances 107-124 

Actually existing value, what constitutes 121-123 

Aggregate amount rediscountable for one bank , . 124 

Amount of, of one interest rediscountable for one bank 121-123 

Definitions 107, 111 

Eligible drafts and trade acceptances 113-118 

Evidence of eligibility 120-121 

Extension of time 107 

Foreign shipments, acceptances based on 112 

Future purchases, acceptances based on 112 

Indorsement of member banks 124 

Ineligible drafts and trade acceptances 118-120 

Maturity 121 

Negotiability of drafts and trade acceptances 109-111 

Nonmember banks, rediscount for 124 

Qualified acceptances 109, 123 

Stamp "trade acceptance" has no value 120 

Promissory notes 77-106 

Aggregate amount rediscountable for one bank 103-104 

Amount of one interest rediscountable for one member bank. . 97-103 

Collateral notes 84, 90 

Commercial and agricultural paper distinguished 79 

Definition of note 77 

Demand notes ineligible 95 

Eligibility tested by use of funds 84 

Eligible classes of notes 77-87 

Evidence of eligibility 92-94 

Indorsement of member banks 104 

Ineligible classes of notes 87-92 

Maturity 94-96 

No obligation to rediscount eligible paper 79-80 

Nonmember banks, rediscount for 87,104-106 

NonnegotKble paper 91-92 

Notes payable before certain date 95 

Renewal notes 82, 87 

Secured notes 83-86 

State member banks, rediscounts for 97, 99, 101-103 

U. S. obligations, notes based on or secured by 86-87,98-99 

Rediscounted paper not limited by: 

U. S. Revised Statutes, section 5200 67, 68, 101 

U. S. Revised Statutes, section 5202 103 

Rediscounts with Federal reserve banks 69-148 

Applications for rediscount 76 

Eligibility of notes, drafts, and bills of exchange 75-76 

Reissuance of acceptances 68 

Renewal drafts, acceptance of 20-21, 38, 51 

Renewal notes, discount of 82, 87, 146 

Renewal of member banks' notes for advances 151-152 

Reserves of international financial corporations 167 

Retail transactions as basis for trade acceptances 116 

Sales corporations, acceptances of 115 



178 Index 

pages 

Security: 

Custody of 24, 36, 138 

Eligible for bank acceptances 45-49 

What constitutes actual 25-27 

Stamp "trade acceptance" has no value 159 

Staples, readily marketable, defined 43, 45 

State member banks, rediscounts for 71, 74, 97, 99, 101-103 

Statements, requirement of 92-93, 120, 159-160 

Sugar in bond, acceptance of drafts against 48 

Sunday or legal holiday, notes due on 151 

Timber, standing, not to be regarded as quick asset 94 

Trade acceptance: 

Actual security 26 

Denned 7, 11 J 

Open market transactions in 153-163 

See also Open market transactions 

Rediscount of 107-124 

See also Rediscount of, Drafts and trade acceptances 

Trust notes, ineligible for rediscount 90 

Trust receipts as actual security 25-26 

U. S. obligations: 

Eligible collateral for member banks' notes 149, 150 

Notes to replace funds for purchase of, ineligible for rediscount. . 88 

Rediscount of paper secured by 71,74,77,86-87,98-99,114 

U. S. Revised Statutes, section 5200 (ten per cent, limit on loans) .. .27-28,64 
Not amended by Federal Reserve Act, section 13 101 

U. S. Revised Statutes, section 5202 (limit on liabilities of bank) . .30,41, 58, 103 

War Finance Corporation bonds: 

Advances on member banks' notes secured by 149 

Rediscount of paper secured by 72, 78, 114 

War savings stamps: 

Drafts to finance purchase of 120 

Paper secured by, ineligible for rediscount 88, 120 

Warehouse receipts: 

Bank acceptances secured by 43-52 

See also Bank acceptances, Secured by warehouse receipts 

Issued by independent warehouses 46, 140 

Issued by lessee 47 

Release of 37,51, 135-137 

Substitution of 51 

Waterworks company, paper of, eligible for rediscount 80 

Wine in bond, drafts against, ineligible for rediscount 120 

Wool, receipt of custodian of, as warehouse receipt 48 



National Bank of Commerce 
in New York 

Established 1839 

Capital, Surplus and Undivided Profits 
Sixty Million Dollars 



President 
James S. Alexander 



J. Howard Ardrey 

Joseph A. Broderick 

Guy Emerson ! 



Vice-Presidents 
Herbert P. Howell 

Louis A. Keidel 
David H. G. Penny 
John E. .Rovensky 



Faris R. Russell 
Stevenson E. Ward 
Roger H. Williams 



Harry P. Barrand 

Louis P. Christenson 

James I. Clarke 



Second Vice-Presidents 

Archibald F. Maxwell 

Franz Meyer 

Cashier 
Roy H. Passmore 



Edward H. Rawls 
Everett E. Risley 
Henry C. Stevens 



Ira W. Aldom 
Emanuel C. Gersten 
Gaston L. Ghegan 
W. Sproull Graves 
Elmore F. Higgins 



Assistant Cashiers 

John J. Keenan 
Walter E. Lovblad 

Don L. Moore 

Alfred J. Oxenham 

Julius Paul 



Eugene M. Prentice 
Henry W. Schrader 
Hamilton G. Stenersen 
Edward Vanderpoel 
John T. Walker, Jr. 



JAMES S. ALEXANDER 
JOHN W. DAVIS 
WILLIAM A. DAY 
HENRY W. de FOREST 



Directors 

FORREST F. DRYDEN 
CHARLES E. DUNLAP 
HERBERT P. HOWELL 



VALENTINE P. SNYDER 
HARRY B. THAYER 
JAMES TIMPSON 
THOMAS WILLIAMS 



LIBRARY OF CONGRESS 

"III"" 



027 331 572 P