It will be recalled that the Federal Reserve Act imposes on the Federal Reserve Board the duty of defining the commercial paper made eligible by the act for rediscount-ing or for open market purchases on the part of the reserve banks. One of the first duties that the Reserve Board had to face was this definition of paper. The Board dealt with the matter in a series of circulars and regulations, the later of which modified or amplified those that preceded. The regulations that now prevall can be found in full in the "Circulars and Regulations, Series of 1917."2

Regulation A of this series deals with the paper eligible for rediscounting under Section 13 of the Reserve Act. The regulation first lays down the general conditions under which a note, draft, or bill of exchange is eligible for rediscount under this section.

(a) "It must be a note, draft, or bill of exchange the proceeds of which have been used or are to be used in producing, purchasing, or carrying or marketing goods in one or more of the steps of the process of production, manufacture, or distribution.

Redis-counting under section 13

Eligible paper

1 June 1, 1917.

2 See Appendix.

(b) "It must not be a note, draft, or bill of exchange the proceeds of which have been used or are to be used for permanent or fixed investments of any kind, such as lands, buildings, or machinery.

(c) "It must not be a note, draft, or bill of exchange the proceeds of which have been used or are to be used for investments of a purely speculative character.

(d) "It may be secured by the pledge of goods as collateral, provided it is otherwise eligible."

In making an application for rediscount the member bank is required to certify on a form provided for the purpose that "to the best of its knowledge and belief" the paper offered is one of the kinds described.

Included in Regulation A are divisions dealing with special types of paper, namely, promissory notes, drafts, bills of exchange and trade acceptances, six months agricultural paper and commodity paper. Each of these groups is separately defined and special conditions of eligibility are prescribed.

A promissory note is defined "as an unconditional prom-ise 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." The obligation is imposed on the reserve bank to satisfy itself that the note is eligible, but as a promissory note might be used for "investment" as well as for "commercial" purposes, and as the reserve bank might, therefore, be uncertain as to its eligibility, the Board has provided that "compliance with the requirements in this respect might be "evidenced by a statement of the borrower showing a reasonable excess of quick assets over current liabilities." The member bank offering the promissory note for rediscount must state whether the note was discounted originally for a depositor or for another member bank, or whether it was purchased from a non-depositor. It must also certify whether a financial statement of the borrower is on file. Financial statements are required to be kept on file for all notes offered for rediscount which have been purchased from sources other than a depositor or a member bank. For other notes the reserve banks are allowed to use their discretion in satisfying themselves as to eligibility. Direct authorization is given to waive the requirement of a statement with respect to any note discounted by a member bank, for a depositor, or another member bank:

Promissory notes

(1) "If it is secured by a warehouse, terminal, or other similar receipt covering goods in storage.

(2) "If the aggregate of obligations of the borrower redis-counted and offered for rediscount at the federal reserve bant is less than a sum equal to 10% of the paid-in capital of the member bank and does not exceed $5,000."

It is thus seen that single-name paper, so common in American bank portfolios, is provided for in the regulations concerning rediscounting, but its use is hedged about with restrictions in order to safeguard from the abuses that have often characterized it in the past such proportion of it as gets into federal reserve banks under these regulations.

A draft or bill of exchange is defined as "an unconditional order in writing, addressed by one person to another, other than a banker (see "Bankers' Acceptances,' below) signed by the person giving it, requiring ,the person to whom it is addressed to pay, in the United States, a1 a fixed or determinable future time, a sum certain in dollars to the order of a specified person; and a trade acceptance is defined as a draft or bill of exchange drawn by the seller on the purchaser of goods sold and accepted by such purchaser." The determination of the eligibility of paper of this class is put squarely up to the reserve banks themselves unless the paper "presents prima facie evidence thereof or bears a stamp or certificate affixed by the acceptor or drawer showing that it is a trade acceptance."

Single name paper included

Drafts, bills of exchange and trade acceptances

Six months' agricultural paper is defined as a note, draft, bill of exchange, or trade acceptance issued for agricultural purposes or based on live stock, that is, paper of these classes "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." To be eligible for rediscount six months' agricultural paper, whether a note, draft, bill of exchange, or trade acceptance, must comply with the eligibility regulations governing these types of paper.

Commodity paper is defined as a "note, draft, bill of exchange, or trade acceptance accompanied and secured by shipping documents or by a warehouse, terminal, or other similar receipt covering approved and readily marketable, non-perishable staples properly insured." In providing tests for the eligibility of this paper the Board prescribed compliance with the eligibility regulations governing those classes of paper to which the commodity paper might belong. The Board prescribed also conformity to the requirements of the federal reserve bank relating to shipping documents, receipts, insurance, etc. But further than this, in view of the special rates of rediscount authorized for this class of paper, the Board provided that the rate of discount or interest, including commission charged the maker of the paper, should not exceed 6% per annum.

A banker's acceptance is defined "as a draft or bill of exchange of which the acceptor is a bank or trust company, or a firm, person, company, or corporation engaged in the business of granting bankers' acceptance credits." The Board's regulation further provides that "to be eligible for rediscount the bill must have been drawn under a credit opened for the purpose of conducting, or settling accounts resulting from, a transaction or transactions involving (1) the shipment of goods between the United States and any foreign country, or between the United States and any of its dependencies or insular possessions or between foreign countries, or (2) the domestic shipmen of goods, provided shipping documents are attached at the time of acceptance; or it must be a bill which is secured a the time of acceptance by a warehouse receipt or other sue document conveying or securing title covering readil marketable staples." The regulation also permits a federg reserve bank to "acquire drafts or bills drawn by a ban or a banker in a foreign country or dependency or insula possession of the United States for the purpose of furnist ing dollar exchange and accepted by a member bank i: accordance with the provisions of the special regulation dealing with this subject." Dollar-exchange drafts or bill may be "acquired before acceptance provided they hav the indorsement of a member bank." The determinate of satisfactory evidence of eligibility is left to the reserv bank itself.

Six months' agricultural paper

Commodity paper

Bankers' acceptances

Eegulation B, Series of 1917, deals with open-marke operations of the reserve banks. Here, too, the Boarc after summarizing the statutory provisions, has one sectio dealing with the general character of eligible bills an acceptances followed by special sections dealing respec tively with bills of exchange and trade acceptances, an with bankers' acceptances.

In determining the general character of paper eligibl for open-market purchases the Board laid down the of. lowing rules: Such paper

(a) " Must not have been issued for carrying or trading i stocks, bonds, or other investment securities, except bonds an notes of the government of the United States.

(b) "Must not be a bill the proceeds of which have been use or are to be used for permanent or fixed investments of an kind, such as land, buildings, or machinery, or for investment of a merely speculative character.

(c) "Must have been accepted by the drawee prior to pui chase by a federal reserve bank unless it is accompanied an secured by shipping documents or by a warehouse, terminal, c other similar receipt conveying or securing title.

(d) "May be secured by the pledge of goods or collateral, provided it is otherwise eligible."

Open market operations

General character of eligible bills and acceptances

In addition to these general requirements, however, there are special provisions concerning the two classes of paper dealt with in the regulation.

The definition of bills of exchange and of trade acceptances in this regulation is the same as in Regulation A. The basis and the test of eligibility is also the same, excepting that in open - market purchases "unless indorsed by a member bank, a bill is not eligible for purchase until a satisfactory statement has been furnished of the financial condition of one or more of the parties thereto."

The definition of bankers acceptances in Regulation B is also the same as that in Regulation A, and there is little difference in the determination of eligibility. In the case of bills drawn abroad, however, for the purpose of creating dollar exchange, the Board first determines whether in the place where the bill is drawn the usages of trade require the drawing of bills of this character. In determining eligibility the reserve banks are in this regulation also left to their own devices, except that it is provided that bills accepted by national banks need no special evidence. When, however, a reserve bank purchases acceptances not indorsed by member banks, the acceptor must furnish "a satisfactory statement of financial condition in a form to be approved by the Federal Reserve Board" and must agree "in writing with a federal reserve bank to inform it upon request concerning the transactions underlying such acceptances."

The amendment to the Reserve Act that provided for the extension to member banks of loans based on the promissory notes of the member banks secured by paper eligible for discount or purchase by the reserve banks was so worded that no further regulation was required by the Reserve Board except the approval of rates for such loans. Mention is made of it here because of its obvious importance to mobility of credit. Immediately after the approval of the amendment the Board sent out a letter to the reserve banks suggesting the establishment of fifteen-day rates for this class of loans.

Bills of exchange and trade acceptances

Bankers' acceptances

Member banks' collateral loans