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i,. FEDERAL RESERVE BOARD WASHINGTON address official correspondence to the federal reserve board X*6124 Septerrib e r 4 , 1928. SUBJECT: T o p i c f o r J o i n t C o n f e r e n c e - Minimum m a t u r i t y on member bank c o l l a t e r a l n o t e s . Bear S i r ; T h e r e i s e n c l o s e d h e r e w i t h copy of a memorandum f r o m t h e B o a r d ' s G e n e r a l C o u n s e l s u b m i t t i n g and commenting upon a p r o p o s e d amendment t o t h e B o a r d ' s r e g u l a t i o n s w h i c h would f i x s e v e n d a y s a s t h e minimum l i m i t a t i o n on a d v a n c e s by F e d e r a l . R e s e r v e iianks t o memb e r b a n k s on t h e i r p r o m i s s o r y n o t e s s e c u r e d b y e l i g i b l e p a p e r o r Government s e c u r i t i e s . Such an amendment hafe b e e n s u g g e s t e d a s a p o s s i b l e means of p r e v e n t i n g day t o day b o r r o w i n g s by member b a n k s f o r t h e making of l o a n s of a s p e c u l a t i v e c h a r a c t e r , a n d t h e B o a r d h a s v o t e d , b e f o r e a c t i n g upon t h e s u g g e s t i o n , to r e f e r i t to t h e f o r t h coming c o n f e r e n c e o f t h e G o v e r n o r s and F e d e r a l R e s e r v e A g e n t s f o r d i s c u s s i o n and r e c o m m e n d a t i o n , a s w e l l a s to t h e f a l l m e e t i n g of the Federal Advisory Council. Very t r u l y y o u r s , E. M. M c C l e l l a n d , Assistant Secretary. TO ALL GOVERNORS AMD FEDERAL RESERVE AC-E2TTS. X-5124-a (COPY) FEDERAL RESERVE BOARD To F e d e r a l R e s e r v e Board. From Mr. V e s t , A s s i s t a n t C o u n s e l . J u n e 2 1 , 1928. SUBJECT: Minimum m a t u r i t y of seven days on member "banks' c o l l a t e r a l notes. I n a c c o r d a n c e w i t h t h e B o a r d ' s r e q u e s t t h e r e h a s b e e n p r e p a r e d and i s a t t a c h e d h e r e t o a d r a f t of an amendment to t h e B o a r d ' s r e g u l a t i o n s which would f i x seven days a s t h e minimum l i m i t a t i o n on a d v a n c e s "by Fede r a l r e s e r v e b a n k s t o member b a n k s on t h e i r p r o m i s s o r y n o t e s s e c u r e d by p a p e r e l i g i b l e f o r r e d i s c o u n t o r b y bonds o r n o t e s of t h e U n i t e d S t a t e s * * * * Some q u e s t i o n may b e r a i s e d a s t o t h e B o a r d ' s a u t h o r i t y to p r e s c r i b e a r e g u l a t i o n of t h i s k i n d . In my o p i n i o n t h e Board h a s t h e a u t h o r i t y u n d e r t h e law to do t h i s i f i t so d e s i r e s . S e c t i o n 13 o f t h e F e d e r a l R e s e r v e Act c o n t a i n s t h e f o l l o w i n g p a r a graph: "The d i s c o u n t and r e d i s c o u n t and t h e p u r c h a s e and s a l e by any F e d e r a l r e s e r v e b a n k of any b i l l s r e c e i v a b l e and of d o m e s t i c and f o r e i g n b i l l s o f exchange, and o f a c c e p t a n c e s a u t h o r i z e d by t h i s A c t , s h a l l be s u b j e c t to such r e s t r i c t i o n s , l i m i t a t i o n s , and r e g u l a t i o n s a s may b e imposed by t h e F e d e r a l Reserve Board." T h i s p r o v i s i o n o b v i o u s l y g i v e s b r o a d a u t h o r i t y to t h e F e d e r a l R e s e r v e Board i n t h e m a t t e r o f r e g u l a t i n g t h e d i s c o u n t and p u r c h a s e of p a p e r b y F e d e r a l r e s e r v e b a n k s . The term " b i l l s r e c e i v a b l e " i n c l u d e s p r o m i s s o r y n o t e s , b i l l s of exchange o r o t h e r i n s t r u m e n t s f o r t h e payment of money, ( s e e WORDS AND PHRASES and B o u v i e r ' s LAW DICTIONARY.) T h i s p r o v i s i o n of l a w , t h e r e f o r e , makes t h e d i s c o u n t of any p r o m i s s o r y n o t e by any F e d e r a l r e s e r v e b a n k s u b j e c t t o s u c h r e s t r i c t i o n s , l i m i t a t i o n s and r e g u l a t i o n s a s may b e imposed by t h e F e d e r a l R e s e r v e B o a r d . The b r o a d a u t h o r i t y to impose any r e s t r i c t i o n s and l i m i t a t i o n s t h u s g i v e n i n my o p i n i o n empowers t h e Board to p r e s c r i b e a minimum l i m i t a t i o n on m a t u r i t y of n o t e s d i s c o u n t e d b y a Fede r a l r e s e r v e bank. The word " d i s c o u n t " a c c o r d i n g t o t h e d e c i d e d c a s e s a p p l i e s n o t o n l y to t h e p u r c h a s e of a n o t e f r o m one who a c t u a l l y owns t h e same, i . e . , t h e p a y e e o r t h e h o l d e r , b u t a l s o i n c l u d e s t h e t r a n s a c t i o n by w h i c h t h e l o a n i s made to t h e maker of a n o t e by t h e p a y e e t h e r e o f . See F l e c k n e r v . Bank, 8 Wheat. 338; N a t i o n a l Bank v . J o h n s o n , 104 U . S . 271; E s t e n v . T h i r d Nat i o n a l Bank ( K y . ) , 42 S.W. 1115; and M o r r i s v . T h i r d N a t i o n a l Bank (C.C.A.) 142 F e d . 2 5 . In t h i s c o n n e c t i o n i t may b e w e l l t o m e n t i o n t h e f a c t t h a t t h e same amendment to t h e law, t h a t of September 7 , 1916, which a u t h o r i z e d F e d e r a l r e s e r v e b a n k s to make a d v a n c e s 6a member b a n k s ' c o l l a t e r a l n o t e s , a l s o i n s e r t e d t h e words " d i s c o u n t and" i n t h e above q u o t e d p a r a g r a p h of S e c t i o n 13. T h i s may b e r e g a r d e d a s of some s i g n i f i c a n c e a s to t h e i n t e n t t i o a of C o n g r e s s . * * * I am, t h e r e f o r e , of t h e o p i n i o n t h a t t h e above q u o t e d p a r a g r a p h of S e c t i o n 13 c o n f e r s upon t h e F e d e r a l R e s e r v e Board t h e a u t h o r i t y to p r e s c r i b e l i m i t a t i o n s and r e s t r i c t i o n s on a d v a n c e s by F e d e r a l r e s e r v e b a n k s t o member b a n k s on t h e i r c o l l a t e r a l n o t e s and t h a t t h i s a u t h o r i t y i s b r o a d enough to empower t h e Board t o p r e s c r i b e seven d a y s a s a minimum l i m i t a t i o n f o r a d v a n c e s of t h i s k i n d . I t may b e r e g a r d e d a s q u e s t i o n a b l e w h e t h e r t h i s p r o p o s e d l i m i t a t i o n on m a t u r i t y of member b a n k s ' c o l l a t e r a l n o t e s i s i n harmony w i t h t h e p u r p o s e of C o n g r e s s i n p r o v i d i n g t h a t F e d e r a l r e s e r v e b a n k s may make a d v a n c e s t o member bonks on t h e i r p r o m i s s o r y n o t e s w i t h m a t u r i t i e s up t o f i f t e e n d a y s . The f o l l o w i n g i s a q u o t a t i o n f r o m a l e t t e r a d d r e s s e d by t h e Governor of t h e F e d e r a l R e s e r v e Board t o S e n a t o r Owen i n 1916 recommending t h e p a s s a g e of t h i s amendment; "The Board h a s recommended i n t h e amendment d e s i g n e d to p r o v i d e f o r 15-day l o a n s , t h a t member banks b e p e r m i t t e d t o p u t up a s c o l l a t e r a l p a p e r of t h e k i n d t h e y can now r e d i s c o u n t , o r Government bonds i n which t h e y can now i n v e s t , and to o b t a i n v e r y s h o r t term l o a n s b a s e d t h e r e o n . E x p e r i e n c e h a s shown t h a t i n many c a s e s where a b a n k would g l a d l y o b t a i n a c commodation f o r a l i m i t e d t i m e , i t does n o t c a r e to go to t h e t r o u b l e of r e d i s c o u n t i n g p a p e r f o r a s p e c i f i c p e r i o d of m a t u r i t y , - a l t h o u g h i t would p r o b a b l y t a k e a d v a n t a g e of an o p p o r t u n i t y to o b t a i n t e m p o r a r y accommodation i f i t c o u l d do so w i t h o u t h a v i n g to borrow f o r t h e f u l l p e r i o d of t h e n o t e ' s m a t u r i t y , o r o t h e r w i s e comply w i t h r e s t r i c t i o n s o r l i m i t a t i o n s t h a t may b e deemed o n e r o u s . I t i s , t h e r e f o r e , recommended t h a t t h e member b a n k s be p e r m i t t e d t o o b t a i n of Fede r a l r e s e r v e b a n k s s h o r t p e r i o d l o a n s of t h i s k i n d . " I t seems a p p a r e n t f r o m t h i s t h a t i t was b a n k s m i g h t borrow on t h e i r p r o m i s s o r y n o t e s even a s s h o r t a s one o r two d a y s . As s t a t e d a b o v e , however, i n my o p i n i o n u n d e r t h e law to p r e s c r i b e t h i s l i m i t a t i o n i f c o n t e m p l a t e d t h a t member f o r very b r i e f p e r i o d s , t h e Board h a s t h e a u t h o r i t y i t deems i t a d v i s a b l e . Respectfully, ( s i g n e d ) George 3 . V e s t , A s s i s t a n t Counsel. w * (COPY) X-6124-t ( P r o p o s e d new s e c t i o n of R e g u l a t i o n A to "be i n s e r t e d a s S e c t i o n X of A r t i c l e A, s u b s e q u e n t s e c t i o n s to b e renumbered a c c o r d i n g l y . ) SECTION X. ADVANCES TO MEMBER BANKS ON THEIR PROMISSORY NOTES. ( a ) Any F e d e r a l r e s e r v e b a n k may make a d v a n c e s to any of i t s member b a n k s on t h e i r p r o m i s s o r y n o t e s p r o v i d e d such n o t e s a r e s e c u r e d by s u c h n o t e s , d r a f t s , b i l l s of exchange o r b a n k e r s 1 a c c e p t a n c e s a s a r e e l i g i b l e f o r r e d i s c o u n t o r f o r p u r c h a s e by F e d e r a l r e s e r v e b a n k s u n d e r t h e p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act o r of t h e R e g u l a t i o n s of t h e F e d e r a l R e s e r v e Board, o r a r e s e c u r e d by t h e d e p o s i t o r p l e d g e of bonds o r n o t e s of t h e U n i t e d S t a t e s . (b) No such a d v a n c e s s h a l l be made f o r a p e r i o d e x c e e d i n g f i f t e e n d a y s n o r f o r a p e r i o d l e s s t h a n seven d a y s . A n o t e of a member b a n k g i v e n f o r any such, advance in no c a s e s h a l l b e c a n c e l l e d o r marked p a i d or s h a l l be r e t u r n e d to t h e member b a n k u n t i l payment i n f u l l of b o t h p r i n c i p a l and i n t e r e s t t h e r e o f s h a l l h a v e b e e n made n o t l e s s t h a n seven days a f t e r t h e advance to t h e member b a n k . No r e b a t e of i n t e r e s t c o v e r i n g any p a r t of such s e v e n - d a y p e r i o d s h a l l b e made i n any c a s e .
@FedFRASER