No amendments to the national banking or currency laws were enacted during Mr. Cannon's administration, and the only material amendment recommended by him was in connection with cotton loans by the banks in the South. Loans of this character during Mr. Cannon's time and for many years thereafter were a source of perplexity to the Comptroller's office and to the banks in the cotton sections as far as the handling of cotton transactions within the limitations of law were concerned as then defined by Section 5200, Revised Statutes of the United States. Cotton loans were represented largely by overdrafts, the very worst form in which credit can be extended, and were subject to the statutory limit. It seemed impossible, or impracticable at least, for cotton buyers to handle their purchases in a way that would bring their transactions with the banks within the exceptions to the limit of loans. A great deal of cotton is bought in small quantities from different planters and must be paid for in cash. The banks are called upon to supply the funds for this purpose while the cotton is being assembled and held for shipment. Notes or drafts cannot always be used in making such purchases, and therefore it is impossible for the cotton buyers to obtain accommodations from the banks in the form of discounts of commercial or business paper or bills of exchange, which are excepted from the limit of loans. Cotton stored in warehouses is an excellent and perfectly safe security for loans, but as the law made no distinction between a secured and unsecured loan in fixing the limit, advances made upon the security of warehouse receipts were subject to the statutory restriction the same as other loans.

Various forms of evasion or circumvention of the law were resorted to by the banks in making cotton loans, and the Comptroller was frequently appealed to for a more liberal interpretation of its provisions. The language of the statute, however, was explicit and would admit of no equivocation. Only two exceptions were made, namely, the discount of commercial or business paper and bills of exchange, drawn in good faith against actually existing values.

It was contended by some bankers that a draft drawn by an agent upon the corporation or firm which he represented, and accepted by the corporation or firm, was a bill of exchange within the meaning of the law and as such was excepted from the limit of loans. Such paper, however, has none of the characteristics of a bill of exchange, which must be drawn by one person upon a second, payable to a third person. Where a bill of exchange is drawn by an agent upon his principal there is only one party liable for the funds represented. When drawn by a corporation or firm upon itself it was held to be nothing more than a promise to pay money in accordance with the terms of the draft. There is only one party to the paper. It is, in substance, a promissory note. The law does not require it to be presented to the drawee for acceptance, as he had already accepted the draft by drawing it. Such an instrument, therefore, is not a bill of exchange, as it does not bind for payment, after acceptance, a drawer and a drawee as distinct persons, companies, corporations or firms.

It was impossible, therefore, for the Comptroller to so interpret the law as to afford the banks of the South the relief they desired to enable them to extend to their customers the accommodations necessary to handle their cotton purchases. Mr. Cannon, therefore, recommended that the law be amended so as to permit loans in excess of the ten per cent. limit to be made upon the security of warehouse receipts or some other form of collateral. This could safely have been done within proper limitations.

The Federal Reserve Act, enacted in December, 1913, authorized the banks to extend credit by accepting drafts or bills of exchange which grow out of transactions involving the importation or exportation of goods or 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; or which are secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title covering readily marketable staples. This provision of law, however, did not relieve the situation materially in the cotton states, as the volume of business of this kind which the banks could handle was very restricted. Furthermore, the acceptance business was a new feature in banking which was not readily or clearly understood by the average country banker.

It was not until the amendment of October 22, 1919, to Section 5200 that material relief was afforded the banks in the way of extending larger accommodations to dealers in cotton and other commodities.

This amendment to the law authorized -

1. The discount, without limit, of drafts and bills of exchange secured by shipping documents conveying title to goods shipped.

2. Demand obligations when secured by documents covering commodities in actual process of shipment.

3. Bankers' acceptances of the kinds described in the Federal Reserve Act.

4. Discount of notes up to twenty-five per centum of the capital and surplus if secured by shipping documents, warehouse receipts, or other such documents conveying or securing title covering readily marketable non-perishable staples, including livestock, when the actual market value of the property securing the obligation is not at any time less than one hundred and fifteen per centum of the face amount of the notes secured by such documents and when such property is fully covered by insurance.

This latter provision extending the limitation on direct loans had been in force only a short time at the date of this writing, but it is believed that it will enable the banks of the South and elsewhere to satisfactorily and adequately finance transactions in cotton and in other staple products within prudent and legal limitations.

WILLIAM L. TRENHOLM Comptroller of the Currency, 1886 1889

WILLIAM L. TRENHOLM Comptroller of the Currency, 1886-1889.