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X-720a
February 7. 1919.
Mr. Benjamin Strong,
Governor, Federal Reserve Bank,
New York; N. Y.
My dear Sir:
Recetpt is acknowledged of your letter of January 29th in which
you ask for a statement of the Board's policy in dealing with accep~.auces
drawn under credits extending (IVer a period Of one Or two years • .lfter
a very full discussion of the matter, the Board has decided t& authorize
this expression of its views in accordance with the principles outlined in
the~~ hereto. The ba.hke of New York may, during a period
which can be declared ended at any time, proceed upon the basis of this
memorandum in accordance with your letter of January 23rd. The essen~ial
principles may be summed up~s follows:
{1) Aooeptance ctedits opened for periods in excess,of ninety
days should only, in exceptional cases, extend over a period of mote ~ban
one year, and in no case for a time exceeding two yea~s.
( 2) Banks whj.ch are members of groups opening these credits,
should not buy their own acceptances, and where an agreement is made with
the drawer for purchase of acceptances for future delivery, the rate should
not be a fixed one, but should be based upon the rate ruling at the time
of the sale.
(3) Transactions covered by these credits should be of a
legitimate cormnercial nature, and acceptances must be eligible accorM:ng
to the rules and regulations of the Board.
f4) Whenever syndicates m·e formed for the pu.r:r;cse of granting
aceeptance credits for more than moderate amo1mts, Federal reserve banks
should be consulted with regard to the transaction. The question of
eligibility, both from the standpoint of the character of the bill and of
the amount involved, will be passed upon by th8 Federal reserve bank subject
to the approcal in each case of th~ Federal Reserve Board.
As stated in the memorandum, the Board will rely upon the fair
spirit of cooperation on the part of the New York banks, but it must be
understood in passing upon these transactions that not only quality but also
quantity must be the contro.lling factors. The aggregate of these acceptances should not be permitted to constitute the greater proportion of outstanding acceptances at any time, and it must be understood that while the
Federal reserve banks and the Federal Reserve Board mieht look with favor
X-72Ce.
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upon a transaction as long as the total amount involved is not excessive,
transactions of exactly the same character may be ruled out whenever the
aggregate amount of outstanding acceptances of this character becomes~ in.
the 4lpinion of the Federal Reserve Board~ unduly large.
You are authoriz8d to communicate the contents of this letter
to the,ac~epting banks of your district, arid the Board will advise the
other Federal reserve banks of the policy which has been .agreed upon.
Very truly yours,
(Signed) Vt. P. G. HARDINGo
Governor ..
@FedFRASER