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July IS, : • Is section 206 of the Bankimg M i l of ltSf, as originally introduced, it was proposed to substitute for the rigid eligibility requirementa that are B O W in the Federal Keserre Aet a prevision that any Federal Reserve bank, under rules and regulations preseribed by the Federal keserre ^oard, m*y discount any corner elal, agricultural, or industrial paper and nay sake advances to a member beak om any sound asset* The principal purposes of the pro o sal ere as followst (1) To encourage recovery by making banks MOTS willing to meet the oflssunity's requirenents for long as well as short-term credit, in the assurance that, in case of need, advance• could be obtained from the Federal Keserre banks on any sound asset* (2) To eliainate from the law ritld lindtations on the kind of paper eligible as a basis for borrowing at the Federal i eserre banks* These lindtations not only failed to protect the banks from disaster, but contributed to the deflation that swept the country in 1950-52. The fact that banks with sound assets were unable to obtain aeeonmodation at the keserre banks beoeuse their paper was not in eligible form caused many banks to call loans and to sell Investments in order to put themselres into a liquid position* This liquidation by the banks caused hardship to borrowers, accelerated the widespread decline in value*-, and was an important factor in brin in the bankinc structure* about the general collapse of • 2 - (5) to recognise In the law the fact that the banks cannot perfi thatr economic function*, or make expenses, if they conf ina thair operations to loans on self-liquidating eligible papar. There is only about 12,000,000,000 of this kind of paper available at tha present time, or 6 parcant of tha banks* aaaatsf and there was only #4,000,000,000, or If parcant of assets, bafora ths eellapse In 1929* So long as banks hold #10,000,000,000 of tha people's sayings, thay M a t ba prepared to make long-tlsa loans* Tha proposal would sat anaourags unsound haaklag but, on iha contrary, would lay down tha prinalpla that soundnass oan ba aohiared only by insisting an tha undarlying quality of loans rathar than on thair form. Tha propoaal in tha Saaata bill would fall short of accomplishing thasa purposas bacauaa it would jprmmmr^m tha discrimination in tha existing law against papar that is not strictly salf-liquidating and of short Tnaturity, by proriding (1) that such papar could not ba usad as a basis of accommodation at tha ^adaral \^*erxe bank until tha bankvs aliglbla papar has baan axtaauatad, and (2) that advanaas «ada on inalijribla papar shall carry a panalty rate of at laast 1 parcant abora tha discount rata. Tha raquirasMBt that allgibla papar oust ba exhausted bafora accommodation on othar papar can ba obtained would laaka a bank hesitate to apply for sueh aaeomodatlon, because this would be giving not lea that it has no liquid paper left* This information, furthermore, would be given to ths directors of the Heeerve bank, who would include three local bankers, possible competitors of tha applying bank* The requirement for a higher rate 1 • 1 • advance* on other than eli i b l e paper would also be an unnecessary disri ination against l«ag«r-tiM paper, thou h this restriction would be leas objectionable in practice than the first* Sinee the ado tioc of the Senate b i l l with these restrictions would do l i t t l e to fncoure^e banks to adopt isore liberal lending policies or to be more Mllir. to weet the eoBroualty's need for lent-time credit, it i s proposed that the b i l l be modified by eli?tirt»tinj these two requirements* Om another point the renate bill containe a pro, osal that has n&eh to conaema i t * Tt foil wi the mergeaey aiais-Stea^all Act of 19*2 la providing that aeeomodatlo^ oa paper# as defined in the Federal Reserre Aot, «ust be obtained on aotes of the aember banks seeured by satisfactory collateral, and that rsdiseounts with Reserve banks by member banks of eustoners' paper shall continue to be subject to existin restrictions. The iieserre banks* portfolios would oonsequently co siet of rsdisoounted paper, that would ooafora to e l i g i b i l i t y ree^iirsnet^ts, and of oftmber bank collateral notee secured to the satisfaction of the 1 caerre banks# whleb» i f experience i s a guide, nay be depeaded upon to require adequate security* The maturity of these collateral notes would be in accord -nee with regulations prescribed by the Federal itesorrs Board* If i t i s thought advisable by Congress* there would be no objection to Uniting the saturity to a maximm of 0 Months, which i s the aaw1 ana maturity pendtted under existing lev for any class of redisoounted paper* It i s believe* that* if the Senate bill* with the suggested Modifications, were enacted, i t would go a lemg way toward accomplishing the desired objectives* ' July I S , ELIGIBILITY (Amendment to Section 202 of h.fc. 7617) . Pag* 149, strike out a l l of linos 1 to IS # Inclusive, and subs t i t u t e the foll<win^i "See* 10(b) lotwitha tending any other provision of law, any >ederal fcesenre bank* under rulss and regulations presold bad by the Board of Governors of the *eceral neserre to any member bank on i t s y»tem, may sake adranoes ro«is«ory notes payable on demand or not more than nine months after date, exolusire of days of grace, ana secured to the s a t i s f a c t i o n of such Federal heserre bank." ,- i
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