Policy Of Federal Reserve Board

The Federal Reserve Board has issued a memorandum stating its policy in dealing with acceptances drawn under credits extending over a period of one or two years, which is reviewed in the following.

Authorization; duration of credits; rate; character; approval of Federal Reserve Board. - In this memorandum, the Board authorized the banks, during a period which may be declared ended at any time, to proceed upon certain principles which may be summed up as follows:

1. Acceptance credits open for periods in excess of ninety days should only, in exceptional cases, extend over a period of more than one year, and in no case for a time exceeding two years.

2. Banks which are members of groups opening these credits should not buy their own acceptances, and where an agreement is made with the drawer for the purchase of acceptances for future delivery, the rate should not be a fixed one, but should be based upon the rate ruling at the time of the sale.

3. Transactions covered by these credits should be of a legitimate commercial nature, and acceptances must be eligible according to the rules and regulations of the Board.

4. Whenever syndicates are formed for the purpose of granting acceptance credits for more than moderate amounts, Federal Reserve banks should be consulted with regard to the transaction. The question of eligibility, both from the standpoint of the character of the goods and of the amount involved, will be passed upon by the Federal Reserve bank, subject to the approval in each case of the Federal Reserve Board.

Quantity As Well As Quality The Controlling Factors

It must be understood, in passing upon these transactions, that not only quality but also quantity must be the controlling factors. The aggregate of these acceptances should not be permitted to constitute the greater portion of outstanding acceptances at any time, and it must be understood that while the Federal Reserve banks and the Federal Reserve Board might look with favor upon a transaction as long as the total amount involved is not excessive, transactions of exactly the same character may be ruled out whenever the aggregate amount of outstanding acceptances of this character becomes in the opinion of the Federal Reserve Board, unduly large.