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1_69 W. P. 8. HARDINII.IIOVIRNOI EX OI'I'ICIO MIIMBIIM ALBERT STRAUSS. YICI 80VIINOI ADOLPH C:. JIILLER CHARLES S. IIAJILIN HENRY A. JIOEHLINPAH CARTER ILASS SICIITAI!hOJ:lHE .TREASURY CIIAIRIIU FEDERAL RESERVE BOARD JOHN SKELTON WILLIAIIS CO•PTROLLII OF THE CURRINCY W. T. C:HAPJIAN. SICRITARY R. G. EIIERSON, ASSISTANT SBC:RETART ADDRESS REPLY TO W. M.IIILAY, FISCAL A.81HT WASHINGTON FEDERAL RESERVE SOARD Februur.f SubJect: ~, 1::)2U. X-lS27 Acceptances of the Continental QQaranty Corporation. Dear Sir:- On Dec~rnber 15, 19l9, the Fedaral Reserve Boar-d addreb;;;ed to you a letter rea.ding os follows; " I'he Fed.eraJ. Re;;.erve Board has been advisect. that the Contimntal G1.1ara:..-..ty Corporation of New York hat> widely circulated circul~s ~d forms relating to a plan which it hns devised to fluance the pt'.rc!la;;;e of automo'b:i.l~s by local dealers from !Ik".nu:facturers, and the :Ooa.rd h~s received from several of the Feder&l Rebetve Bank& in~~iries not only au to the nllture end scope Of this pl-m but al::;o as to whether or not :pcrpcr drawn nnd accepted there-:.mder is eligible for rediscouut t<s a bcankers' ncceptance. 11 ·The lloard l.s of the opinion thnt teclmicul.ly the dtafts described, when accepted by the Contincnt~l Gue.r~ ty Corporation, come within it:; definition of a b~:nk ers t acceptance set forth in itt> regulat:tons ~d as ~;;l.lch are technically eligible for dio>count provided that they comply in other re~pects with the terms of the law and the re~~lations of the Federal Reserve Board. " The Loard has been advised further that its letter of July 22, 1919, addredsed to the Continental Guaranty Corporation~ stating that its occ~ptRnces of the kinds described would be eligible for discount provided, of course, thnt they comply with the varlous terms of the Federsl Reserve Act and the regulations of the Bonrd; has been widely distributed with its other circulars and forms e.mong banks Md bankers throu6fiout the country. 1ec::.u.ue of the very eenera.l mis~~erst~din6 which evidently bas resulted, the J3oc..rd wishes to state that this letter of July 22, 191::;, was not in fact am should not in any way be construed to be t>.n expression of its approval of the merits or desirability of the paper aG an investnent either by the reserve bi'Ulks or their member banks, and the :doard regrets that it has be~ circularized in such a manner as 1_70 ( . . -2.,. X-1827 •. to give undue advertising valhe to the plan of the Continental Guaranty Corporation :·which it accompanies. " Federal Reserve Banks are, of course, aware that it is their right nnd duty carefully to consider the merits or bankable risk attached to any paper presented either for rediscount or purchase And in their own diBcretion to accept or refuse the paper on the basis of thi'i.t celn:;;ideration, The }iOard beHaves, however, that many me!Wer banks may fail to appreciate that tecb:J.icn.l elie,,:i.bility does not of itself imply desirability and you are therefore requested, whenever opport~,ities afford themselves, carefully to indicate this distinction to member banks interested with a view of correcting what might otherwiae be a wrong impresBion of the purpose and effect of the Board's letter referred to. above." Bece-,use of the Board's strtem::nt in the ebove letter to the effect that it had been advised that 1 ts letter of July 22, 191~, addressed to the Continental Guaranty Corporation, hro been " widely dh tributed" with the other circulars and f onns of that Corporation anong banks tmd bankers throue;hout the country, the Continental Gaaranty Corporation in a letter addressed to the ~oard under date of January 15, 1920, hn~ explained that althoagh " in a small nWllber of cases specific reference" has been made by it to the Board 1;, letter of Ju.ly 22 in correspondence with banks who have 11 asked the direct ques ti.on of our authority for the eligibility of the drafts or has expra~sed doubt as to their eli6ibility" and although in one particular instance a copy of the ]oard 's J..e·tter wn.s forWarded to a bank end although a photostatic copy of the Board's letter wns 6iven to each one of its twenty field representatives to show to AnY banker whenever the eli~ibility of the C·..;I'pora.tion :s a.co:;ept~m.:;.ea is at is::;ue, nevertheless " in no other case can any officer :Jf tJ:.e Corporation remember having sent out a copy of this letter to Any cne in c(lrrt;~>pon dence ·" In concluding the Corporation stated that i t 11 ba;; never V<;ed the Board ts letter of July 22 1 except in the brdinary and prope:r.· cr;urse of bu~>ines::; unless such use has been by some one of the ciis tx·ic ~ rep·~ resenta.tives who has parted with his copy of said letter without authority md agninst the express prohibition of the officers of the Corpomtion and that therefore the Boatd was misinformed in the premises ~pon which its letter of Decerr:ber 15 to the Federal Reserve Banks was written.. 11 The Board i~, of cour~e, glad to be advised that the Continental Guaranty ·.corporation 1 ttielf has not, except in the cases recited, sent out o. copy of the Bo.ard •s letter to a.eyone in correspondence. In view of that explanation it is probable that roost' of the advices received by th0 Federnl Re::.erve Eoard with reference to the use of thc.t letter by the Corporation were based upon the p_"tlotostatic copy vvb.ich had been furnished by the Corporation to ench of its twenty field representatives with expresl; authority to show it to the interviewed brmker whenever the eligibility of the Corporation's paper was nt iasue. i71. -3- X-1627 Independently, however, of the precise extent to or mnnner in which the Iioard 1s original letter was brou~ht to the attention ~f banks and banker~ throu6hout the country, the ]oard wishes to reaffirm its former opinion that its original letter of July22, 1919, "was not in fact and should not in anyway be cunstrued to be an expression of its approval of the r~rits or desirability of the paper ( of the Continental Guaranty Corporation ) as an investment either by the reserve bonks or their member bonks," and that Federo.l Reserve Do.nks should indicn.te to interested n:ember banks tho.t a ruling by the Iloard as to technical eligibility should not of itself imply approval or disapproval of the merits of the pape~. Iecause of the fact, however, that the Continental Guaranty Corporation has stated in its letter, addressed to the Ioard, th2t "UJ?.doubtedly very great injury is being done to the credit of the Corporation with the banks who have received copies of or notice of the board's letter of December 15, " the 1oard wi.shes to advise that, while its original letter of July 22, 1:;13, should not~ .be construed in any way to approve the m0ri ts or desirability of the Corporation's p~per, so also. its oUb~equent letter of December 15, quoted nbove, should not be construed to be on expression of the board 1s disapproval of the m; ri ts or desirability of that paper. The purpose of that letter wn" solely to ~<2lb1..4t !"ny .erroneous infel'ences thRt may have bee<-1. drn.w:n by bankb or bankers receiving or seeing typed or photost~tic copies of the loard 1s original letter po.soing upon the mere technical eligibility of the paper issued in accoAdunce with a specified plan. This letter is udclressecl to you in oni.er thD-t you r::1ight wherever possible correct A.ny misundorst!:J.nding of thnt purpose th<t t rul;l.y ex.i st. Ver1 truly yours, It Gove mor- To Governor:. ::md Chn.irmen of all F .R~ Lnnks,
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