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Ex -O ffic io Members W. P. G. HARDING, G o v e r n o r PAU L M. WARBURG, v i c e G o v e r n o r FREDERIC A. DELANO ADOLPH C. M ILLER CHARLES S. HAMLIN W ILLIAM G. McADOO SECRETARY OF THE TREASURY CHAIRMAN JOHN SKELTON W ILLIAM S COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD H. PARKER W ETARY SHERMAN P. ALLE N , ASST. SECRETARY AND FISCAL AGENT WASHINGTON ADDRESS REPLY TO FEDERAL RESERVE BOARD February l6, 1917 Dear Sir: The Board deems it advisable that the Federal reserve banks should understand clearly what they may and may not do in the way of rediscounts or loans based upon United States Govern ment bonds or notes. For your information,, therefore, a memo randum which has been prepared b r counsel and which has been ap j proved by the Board, is sent to you herewith, as follows: Section 13 of the Federal Reserve Act provides two methods whereby Federal reserve banks may make advances to their member banks for the purpose of enabling them or their customers to carry or trade in bonds or notes of the United States. Paragraph 2 of Section 13 provides that upon the en dorsement of a member bank, a Federal reserve bank may discount notes, drafts, and bills of exchange arising out of actual com mercial transactions, which may or may not be secured by staple agricultural products or other goods, wares or merchandise. The law then states that "such definition” of eligible paper shall not include notes, drafts, or bills of exchange drawn for the purpose of'"carrying or trading in stocks, bonds or other investment secur ities except bonds and notes of the Government of the United States.” 102U. - 2 - This is equivalent, to an affirmative declaration that a Federal re serve hank may discount a note, draft, or hill of exchange endorsed hy a member hank which is issued or drawn for the purpose of carry> ing or trading in bonds or notes of the United States. * This clause of Section 13 , however, does not permit of the discount for a member hank of one of its own hills payable, since the Requirement that the note or hill must he endorsed hy a member hank precludes the possi bility of applying this provision to the discount of anything hut customers * paper. The amendment to.Section 13, approved-September 7 j 1916, provides on the other hand that a Federal reserve hank may make h - advances to its member banks-.on their promissory notes for a period not exceeding fifteen days, provided, such notes are secured hy cer tain specified classes of paper or ,by a deposit or pledge of bonds T or notes of the United States.n . y It is evident, therefore, that a member hank may borrow directly from its Federal reserve hank on the security of Government obligations, hut not for a period longer than fifteen days* Under the provisions of Section 14, subsection (h), Fed- 1 eral reserve banks are authorized Tto buy and sell at home and l y abroad, bonds and notes of the United Statesn and under authority of this section member banks owning Government obligations may properly sell them to any Federal reserve bank desiring to make the purchase* 102U -3- S U M M A R Y I. Any member bank which has loaned money to any of its customers for the purpose of carrying or trending in bonds or notes of the United States, may rediscount with its Federal re serve bank the bill or note of its customer, provided, such bill or note (a) Has a maturity at the time of discount of not more than ninety days, exclusive of days of grace) (b) Has the endorsement of the member bank. Such bill or note, however, need not necessarily be secured and need not be drawn for a commercial purpose other than for the purpose of carrying or trading in notes or bonds of the United States, II. Any member bank which has itself purchased obliga tions of the United States may procure advances from its Federal reserve bank, for not exceeding fifteen days, on its own promissory note, provided, such note is secured by 3 deposit or pledge of bonds or notes of the United States* III- Any member bank owning bonds or notes of the United States may, under authority of Section 14, subsection (b), sell such bonds or notes to any Federal reserve bank, desiring to make the purchase• Very truly yours, Governo
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