PAPER ELIGIBLE FOR REDISCOUNT AND PURCHASE BY FEDERAL RESERVE BANKS APER which the various Federal Reserve Banks discount and buy falls into three general classifications: I. Notes, drafts, bills of exchange, trade acceptances II. Bankers' acceptances eligible for rediscount by the III. Bills of exchange, trade acceptances and bankers' Since the circumstances governing the discount, rediscount and sale of the various types of this paper depend largely upon rulings of the Federal Reserve Board, and since these rulings must of necessity be changed from time to time, it would be impractical for the purposes of this book to minutely detail them here. The question of acceptance of drafts or bills of exchange for the purpose of creating dollar exchange is not discussed at all because, although the pertinent rulings are of vital interest to a few banks, the type of paper represented is not of interest to any great number of banks as acceptors. In the discussion of the other three general classes of paper that follows, the purpose is to set forth the fundamental principles underlying banking practice in this regard, as allowable under the Federal Reserve Act and rulings of the Federal Reserve Board, rather than to give a detailed analysis of all the governing conditions. This latter named phase of the subject is covered in pamphlet form by the Federal Reserve Board itself, and a copy of the current regulations of this body is, of course, at all times in the hands of every member bank. I Notes, drafts, bills of exchange, trade acceptances and six months' agricultural paper eligible for rediscount by the Federal Reserve Banks Definitions as laid down by the Federal Reserve Board: Promissory Note-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. Draft or Bill of Exchange-An unconditional order, in writing, addressed by one person to another, 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. Trade Acceptance-A draft or bill of exchange, drawn by the seller on the purchaser, of goods sold, and accepted by the purchaser. Six Months' Agricultural Paper-A note, draft, bill of exchange, or trade acceptance, drawn or issued 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 marketing of live stock, and which has a maturity at the time of discount of not more than six months, exclusive of days of grace. The Federal Reserve Act provides that any Federal Reserve Bank may discount for any of its member banks any note, draft, or bill of exchange, provided: (a) It has a maturity at the time of discount of not more than 90 days, exclusive of days of grace; but if drawn or issued for agricultural purposes 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 transactions; that is, it must be a note, draft, or bill of exchange which has been 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. (c) It was not issued for carrying or trading in 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 bearing the signature or indorsement of any one borrower, whether a person, company, firm, or corporation, rediscounted for any one member bank, whether State or National, shall at no time exceed 10 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 the Federal Reserve Board's regulations. 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 10% of the capital and surplus of that state 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. Any Federal Reserve Bank may make advances to its member banks on their promissory notes for a period not exceeding 15 days, provided that they are secured by notes, drafts, bills of exchange, or bankers' acceptances which are eligible for rediscount 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 Corporation. 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 (a) It must be a note, draft, or bill of exchange which has been issued (c) It must not be a note, draft, or bill of exchange the proceeds of 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, proIvided it (the note, draft, or bill of exchange) is otherwise eligible. Special conditions of eligibility for discount at the Federal Reserve Bank are applied in the case of each class of paper. II Bankers' acceptances eligible for rediscount Definition: A banker's acceptance within the meanings of the Federal Reserve Board Regulations, 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 generally in the business of granting bankers' acceptance credits. A Federal Reserve Bank may rediscount any such bill having a maturity at the 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: (a) The shipment of goods between the United States and any foreign country, or between the United States or any of its dependencies, or between foreign countries; (b) The shipment of goods within the United States, providing shipping documents conveying security title are attached at the time of acceptance; (c) The storage of readily marketable staples,1 providing the bill is secured at the time of acceptance by a warehouse receipt, or other such document conveying security title. In order to be eligible, acceptances for any one customer in 1 See note, page 73. excess of 10 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 security 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. Although a Federal Reserve Bank may legally rediscount an acceptance having a maturity at the time of not more than three months, exclusive of days of grace, it may decline to rediscount any acceptance the maturity of which is in excess of the usual or customary period of credit required to finance the underlying transaction or which is in excess of that period reasonably necessary to finance such transaction. Special conditions of eligibility for rediscount by the Federal Reserve Bank are laid down in greater detail by the Federal Reserve Board. III Bills of exchange, trade acceptances, and bankers' acceptances purchased in the open market by the Federal Reserve Bank The Federal Reserve Banks may, under rules and regulations prescribed by the Federal Reserve Board, purchase and sell in the open market, at home or abroad, from or to domestic or foreign banks, firms, corporations, or individuals, bankers' acceptances and bills of exchange of the kinds and maturities made eligible by the Federal Reserve Act for rediscount, with or without the indorsement of a member bank. As a matter of fact, the bulk of the Federal Reserve Banks' transactions in paper of this sort consists in sales and purchases in the open market, under the section of the Act so permitting. The Federal Reserve Board has determined that a bill of exchange or acceptance to be eligible for purchase by Federal Reserve Banks under this provision of the Federal Reserve Act must |