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1 0 c: 8i W . P . G . H A R D I N G . GOVERNOR E x OFFICIO MEMBERS E D M U N D PLATT.VICE GOVERNOR ADOLPH C. MILLER DAVID F . H O U S T O N , SECRETARY OF THE TREASURY CHAIRMAN F E D E R A L J O H N S K E L T O N WILLIAMS COMPTROLLER OF THE CURRENCY R E S E R V E B O A R D C H A R L E S S . HAMLIN * HENRY A. MOEHLENPAH < W . T. C H A P M A N . SECRETARY R . G . E M E R S O N . ASSISTANT SECRETARY A D D R E S S REPLY TO FEDERAL RESERVE BOARD W . M. IMLAY. FISCAL AGENT WASHINGTON November 24,1920, Subject: X-2071 A g r i c u l t u r a l Implement Paper, Dear S i r : The Federal Reserve Board r e c e i v e s from time to time i n q u i r i e s with r e f e r e n c e to the e l i g i b i l i t y f o r rediscount by Federal Reserve Banks of paper a r i s i n g out of the purchase of a g r i c u l t u r a l implements and farm machinery of v a r i o u s kinds. In view of these i n q u i r i e s the Board has made the following r u l i n g : D e f i n i t i o n of E l i g i b l e Commercial and A g r i c u l t u r a l Paper The r e g u l a t i o n s of the Federal Reserve Board d e f i n e e l i g i b l e commercial and a g r i c u l t u r a l paper a s notes, d r a f t s or b i l l s of exchange which have been issued or drawn, or t h e proceeds of which have been used or a r e t o be used i n t h e f i r s t i n s t a n c e i n producing, purchasing, carrying, or marketing goods (including goods, wares, merchandise 6r a g r i c u l t u r a l products, i n c l u d i n g l i v e stock) in one or more of the steps of the process of production, manuf a c t u r e or d i s t r i b u t i o n . If a note, d r a f t , or b i l l of exchange has been issued or drawn, or the proceeds have been or a r e t o be used, f o r an a g r i c u l t u r a l purpose, t h a t note, d r a f t , or b i l l of exchange may be e l i g i b l e f o r rediscount if i t has a maturity a t the time of rediscount of not more than s i x months exclusive of days of grace. On the other hand, if a note, d r a f t , or b i l l of exchange has been issued or drawn, or the proceeds have been or a r e t o be used, for a commercial purpose, i t w i l l not be e l i g i b l e f o r r e discount if i t has a maturity a t t h e time of rediscount i n excess of ninety days exclusive of days of grace. The Board's r e g u l a t i o n s f u r t h e r provide t h a t no note, d r a f t , or b i l l of exchange i s e l i g i b l e f o r rediscount if the proceeds have been or a r e t o be used f o r permanent or f i x e d investments of any kind, such a s land, b u i l d i n g s , f i x e d machinery, or f o r any other c a p i t a l purpose. A copy of the Federal Reserve Board's r e g u l a t i o n s , S e r i e s of 19^0, i s enclosed, herewith, Regulation A of which deals with the subject of the e l i g i b i l i t y of paper f o r rediscount by Federal Reserve Banks. Two general c l a s s e s of E l i g i b l e A g r i c u l t u r a l and Paper. Commercial I t w i l l be observed t h a t t h e r e a r e two general c l a s s e s of e l i g i b l e a g r i c u l t u r a l and commercial paper, (1) paper which i s e l i g i b l e because issued or drawn f o r an a g r i c u l t u r a l or commercial purpose, and (2) paper which i s e l i g i b l e because t h e proceeds have been or a r e t o be used f o r an a g r i c u l t u r a l or commercial purpose. -2- x-2071 1 0 8 2 Notes given i n payment f o r A r t i c l e s Purchased. Since the purchase and s a l e of goods of any c h a r a c t e r i s a commercial t r a n s a c t i o n from t h e standpoint of the s e l l e r , a note of a buyer given t o the s e l l e r i n p a y m e n t f o r a r t i c l e s purchased i s a note which has been "issued or drawn" f o r a commercial purpose. Such a note may, t h e r e f o r e , be e l i g i b l e f o r rediscount i r r e s p e c t i v e of whether or not the a r t i c l e s purchased w i l l c o n s t i t u t e a permanent or f i x e d investment i n t h e hands of the u l t i m a t e p r o d u c e r . This i s t r u e whether the buyer i s a d e a l e r , p u r chasing a r t i c l e s f o r r e - s a l e , or i s a farmer purchasing a r t i c l e s f o r h i s own u s e . Notes the Proceeds of which a r e used t o Purchase A r t i c l e s . If a note i s not "issued or drawn" f o r a commercial or a g r i c u l t u r a l purpose, i t s e l i g i b i l i t y or i n e l i g i b i l i t y f o r rediscount must be determined by the purpose f o r which t h e proceeds have been or a r e t o be used. The use of proceeds t o purchase goods f o r r e - s a l e i s a commercial purpose even though the a r t i c l e s a r e of such a c h a r a c t e r t h a t they must be considered permanent investments i n the hands of those who u l t i m a t e l y purchased them. Consequently the note of a dealer discounted by him a t h i s l o c a l bank t o provide funds t o purchase a r t i c l e s f o r r e - s a l e may be e l i g i b l e f o r r e d i s count as commercial paper i r r e s p e c t i v e of the c h a r a c t e r of such a r t i c l e s . A note of a farmer, however, discounted by him a t h i s l o c a l bank t o provide funds with which t o purchase a r t i c l e s f o r a g r i c u l t u r a l uses i s e l i g i b l e or i n e l i g i b l e f o r rediscount according to the c h a r a c t e r of such a r t i c l e s . The f a r m e r ' s note i s i n e l i g i b l e f o r rediscount if the a r t i c l e s a r e i n the nature of a permanent or f i x e d investment, but on the o t h e r hand i f they a r e a r t i c l e s which a r e f o r a g r i c u l t u r a l uses and which have to be replaced from time to , time the f a r m e r ' s note may be e l i g i b l e f o r rediscount a s a g r i c u l t u r a l i . paper. A r t i c l e s i n the Nature of Permanent or Fixed Investments. Whether or not given a r t i c l e s a r e i n the n a t u r e of permanent or f i x e d investments a s t h a t term i s us»d i n the Board's r e g u l a t i o n s , i s a question which depends upon the circumstances i n each p a r t i c u l a r c a s e . The Board has r u l e d t h a t farm t o o l s , a g r i c u l t u r a l implements and machinery, and other farm operating equipment do not c o n s t i t u t e permanent or f i x e d investments when they a r e of such a c h a r a c t e r t h a t they have t o be replaced w i t h i n a comparatively s h o r t time, so t h a t i t may be assumed t h a t a farmer w i l l have t o spend a c e r t a i n amount of money annually and r e g u l a r l y f o r t h e purchase and replacement of equipment of t h i s kind (F.R. B u l l e t i n , Feb. 1916, page 67). So a l s o , t h e Board has s p e c i f i c a l l y ruled t h a t a t r a c t o r , l i k e horses and mules, bought f o r farm work and purchased with several y e a r i 1 use i n view, does not c o n s t i t u t e a permanent or f i x e d investment, and t h a t a note, the proceeds of which a r e used t o pay f o r such a t r a c t o r , aay be e l i g i b l e a g r i c u l t u r a l p a p e r . (F.R. B u l l e t i n , Apr. 19I8, page 309)• On the other hand, the Board has r u l e d t h a t a s i l o i s a permanent or f i x e d investment and t h a t a n o t e t h e proceeds of which have been used t o b u i l d a s i l o i s not e l i g i b l e a g r i c u l t u r a l p a p e r . ( F . R . B u l l e t i n , Oct. 1918, page $%1), The Board has a l s o r u l e d , upon the b a s i s of the f a c t s i n the p a r t i c u l a r case, t h a t an e l e c t r i c system f u r n i s h i n g l i g h t and power f o r an i n d i v i d u a l farm i s i n the n a t u r e of a permanent or f i x e d investment w i t h i n t h e meaning of the Board's r e g u l a t i o n s . • < x.207i 1 0 8 3 > D i s t i n c t i o n between A g r i c u l t u r a l paper and Commercial Paper The purchase and s a l e of any a r t i c l e s or commodities i n c l u d i n g a g r i c u l t u r a l products i s a commercial r a t h e r than an a g r i c u l t u r a l t r a n s a c t i o n . Consequently the note of a dealer, whether i t i s given i n payment f o r a r t i c l e s or commodities purchased f o r r e - s a l e or i s discounted by t h e d e a l e r a t h i s bank t o provide funds with which t o purchase such a r t i c l e s or commodities, can be e l i g i b l e f o r rediscount only a s commercial paper, even though t h e a r t i c l e s or commodities w i l l be used by the u l t i m a t e p u r chasers f o r a g r i c u l t u r a l purposes. Such a note can be e l i g i b l e f o r r e d i s count, t h e r e f o r e , only when i t has a maturity a t t h e time of rediscount of not more than n i n e t y days. The note of a farmer, however, given i n payment f o r a r t i c l e s or commodities purchased, may be considered a g r i c u l t u r a l paper which i s e l i g i b l e f o r rediscount when i t has a m a t u r i t y a t the time of r e d i s c o u n t of not exceeding six months, provided t h a t the a r t i c l e s or commodities purchased a r e t o be used by the farmer f o r a g r i c u l t u r a l purposes and a r e n o t i n t h e n a t u r e of permanent or f i x e d investments. So a l s o , of course, the note of a farmer, discounted by him a t h i s l o c a l bank f o r the purpose of providing funds t o purchase such a r t i c l e s or commodities, may be e l i g i b l e f o r rediscount a s a g r i c u l t u r a l paper when i t has a maturity a t the time of rediscount of not mora than six months. Since the purchase and s a l e of a g r i c u l t u r a l products i s , a commercial r a t h e r than an a g r i c u l t u r a l t r a n s a c t i o n , a note given to a farmer i n payment f o r a g r i c u l t u r a l products grown by him cannot be e l i g i b l e f o r rediscount a s a g r i c u l t u r a l paper, but nay be e l i g i b l e a s commercial paper if i t has a m a t u r i t y a t the time of rediscount of not more than ninety days. Same p r i n c i p l e s apply t o D r a f t s a s t o Notes. . In t h e foregoing statements and discussions of h y p o t h e t i c a l cases where payment f o r goods purchased i s made by the buyer giving t o the s e l l e r a n e g o t i a b l e instrument r e p r e s e n t i n g the b u y e r ' s o b l i g a t i o n s , i t has been assumed f o r the sake of b r e v i t y t h a t the negotiable instrument would be a note of t h e buyer. As a matter of f a c t , i n such cases t h e buyer may e i t h e r make h i s own note or accept a d r a f t drawn on him by the s e l l e r . In e i t h e r case, however, t h e same p r i n c i p l e s w i l l apply i n determining whether the instrument r e p r e s e n t i n g the b u y e r ' s o b l i g a t i o n i s commercial paper, which cannot be rediscounted if i t has a maturity i n excess of ninety days, or a g r i c u l t u r a l paper, which may be rediscounted with a maturity not i n excess of six months. Ho Obligation t o Rediscount Paper even though E l i g i b l e . I t should be understood, of course, t h a t even though a b i l l or note nay t e c h n i c a l l y be e l i g i b l e f o r r e d i s c o u n t , a Federal Reserve Bank i s under no o b l i g a t i o n t o rediscount i t , but may accept i t or r e f u s e i t i n t h e e x e r c i s e of i t s d i s c r e t i o n a r y power. Yours very t r u l y , Governor. To Governors and Federal Reserve Agents.
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