The chief business of the Federal reserve banks, presumably, will be the rediscounting of commercial paper for member banks. As we have seen, one of the most serious defects of our banking system has been the absence of any strong centralized agency to which the banks of the country could turn in time of need to convert some of their assets into money. The new law aims to correct this defect by creating a number of these agencies, at convenient centers in the country, with power and ample resources to rediscount for member banks the commercial paper which constitutes a considerable portion of their investments. The provision in the Act regarding the character of paper eligible for rediscount reads as follows:

"Upon the indorsement of any of its member banks, with a waiver of demand, notice, and protest by such bank, 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 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 staple agricultural products, or other goods, wares, or merchandise from being eligible for such discount; but such definition shall not include notes, drafts, or bills covering merely investments or issued or drawn for the purpose of carrying or trading in stocks, bonds, or other investment securities, except bonds and notes of the Government of the United States. Notes, drafts, and bills admitted to discount under the terms of this paragraph must have a maturity at the time of discount of not more than ninety days: Provided, That notes, drafts, and bills drawn or issued for agricultural purposes or based on live stock and having a maturity not exceeding six months may be discounted in an amount to be limited to a percentage of the capital of the Federal reserve bank, to be ascertained and fixed by the Federal Reserve Board."

The Act does not define commercial paper except in general terms, but it specifically excludes investment paper. One of the first and most important duties of the Reserve Board will be to determine the character of the commer-cial paper which reserve banks may rediscount for member banks. Reference has been made in an earlier chapter to the change in business practice by which two-name commercial paper has largely been displaced by single-name paper, which in many cases cannot be regarded as strictly commercial. Single-name paper has become so nearly universal in certain lines of business, and has become so thoroughly ingrained in our commercial practice, that it seems impracticable to return to the old methods to any considerable extent. There does not seem to be any good reason for excluding high-grade one-name notes from the privilege of rediscount if the discounting bank produces evidence that the loan is to be used for strictly mercantile purposes as contemplated by the Act. "Yet," says one writer, "there will certainly arise a tendency to devise forms of paper which, while consistent with the existence of trade discounts, will disclose more distinctly than the present promissory note the purpose of the borrower to use the loan for mercantile, and no other, purpose."1

Though some experienced bankers hold that rediscount-ing will be resorted to only in times of stringency when it is necessary for a bank to strengthen its reserves, the practice will nevertheless be freed from the suspicion which in the past has attended it in this country. "The rigidity of credit banking in the past, the destructive snatching for reserves, are displaced by a system which allows good commercial paper, under certain limitations, to be converted into lawful reserves. . . . Therefore, in a time of panic - if any such arrives - there will be no reason for a run on cash reserves, or if there is a semblance of it, there will be a quick and ready way by which the reserves can be replenished."2