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e x OFFICIO W. P . G. HARDING, GOVERNOR ALBERT STRAUSS. VICE GOVERNOR CARTER C L A S S S * 6 L « M L N 0 F THE TREASURY CHAIRMAN ADOLPH C. MILLER CHARLES S . HAMLIN J O H N SKELTON WILLIAMS COMPTROLLER OF THE CURRENCY ADDRESS REPLY TO FEDERAL RESERVE BOARD FEDERAL RESERVE BOARD HENRY A. MOEHLENPAH W . T. CHAPMAN, SECRETARY R. G. EMERSON, ASSISTANT SECRETARY w . M. INLAY, FISCAL AGENT WASHINGTON October 27,1919. X-1707 Subject: E l i g i b i l i t y f o r Rediscount of Cotton F a c t o r s * Paper, Dear S i r : There i s quoted, below, f o r your i n f o r m a t i o n , t h e t e x t of a l e t t e r r e c e n t l y a d d r e s s e d t o one of the F e d e r a l Reserve Banks, i n which the Board d e f i n e s i t s view a s to the e l i g i b i l i t y of c o t t o n f a c t o r s ' p a p e r : "The Federal Reserve Board h a s c a r e f u l l y c o n s i d e r e d the q u e s t i o n whether c o t t o n f a c t o r s 1 paper may p r o p e r l y be c o n s i d e r e d e l i g i b l e f o r r e d i s c o u n t a s commercial paper w i t h i n the meaning of S e c t i o n 13 of the Federal Reserve Act. The Board i n i t s c o n s i d e r a t i o n of t h i s s u b j e c t h a s examined the b r i e f submitted by t h e d i r e c t o r s of the Memphis Branch of the F e d e r a l Reserve Bank of S t . l A i i s * t o g e t h e r With t h e l e t t e r s and s t a t e m e n t s of v a r i o u s other p e r s o n s i n t e r e s t e d i n the d e t e r m i n a t i o n of the q u e s t i o n . "In view of the f a c t t h a t i t i s apparent hand t h a t the c i r c u m s t a n c e s and c o n d i t i o n s under paper i s i s s u e d vary so much i n d i f f e r e n t c a s e s , c a t e g o r i c a l answer t o the q u e s t i o n p r e s e n t e d , or t h a t c o t t o n f a c t o r s ? p a p e r , a s such, i s e l i g i b l e from a l l the evidence on which s o - c a l l e d c o t t o n f a c t o r s ' i t i s impossible t o give any to make any g e n e r a l r u l i n g f o r rediscount. "The Board i s f i r m l y of the opinion on the one hand t h a t p a p e r , the proceeds of which a r e used t o l e n d t o some t h i r d p a r t y , i s f i n a n c e paper r a t h e r than commercial paper and i s , i n consequence, i n e l i g i b l e f o r r e d i s c o u n t even though t h a t t h i r d p a r t y may u s e the proceeds f o r a commercial purpose. On the other hand, the Board b e l i e v e s that any p a p e r , the proceeds of which are used t o purchase goods t o s e l l t o some t h i r d p a r t y , i s e l i g i b l e f o r r e d i s c o u n t a s commercial paper w i t h i n the meaning of Section 1 J . Whether or n o t a given t r a n s a c t i o n f a l l s w i t h i n one c l a s s at the o t h e r , i s s o l e l y a q u e s t i o n of f a c t f o r the d e t e r m i n a t i o n of the D i r e c t o r s of the F e d e r a l Reserve Bank to which the paper i s p r e s e n t e d f o r r e d i s c o u n t . I n other words, the mere f a c t t h a t a borrower on a given n o t e i s a c o t t o n f a c t o r , does n o t of i t s e l f r e n d e r t h a t n o t e i n e l i g i b l e , s i n c e i t s e l i g i b i l i t y i s a m a t t e r t o be determined by the use to which the p r o c e e d s of t h a t p a r t i c u l a r note a r e p u t . I f a c o t t o n f a c t o r borrows on h i s own note t o i n c r e a s e h i s c a p i t a l f o r t h e purpose of l e n d i n g t o h i s customers, the n o t e would come w i t h i n t h e f i r s t c l a s s and would be i n e l i g i b l e , b u t i f i t can be determined t h a t the proceeds of the n o t e i n s t e a d of b e i n g r2r X-1707 loaned, t o a customer by the f a c t o r are used by the f a c t o r t o purchase goods which are shipped t o the customer and which a r e charged by the f a c t o r a g a i n s t the customer's account, then the note a t t a i n s a commercial s t a t u s because of the commercial purpose to which i t s proceeds are applied by the f a c t o r . In order t o a s c e r t a i n the necessary f a c t s i t may be proper f o r a Federal Reserve Bank to r e q u i r e statements or a f f i d a v i t s from the maker of the note as to the exact n a t u r e of the t r a n s a c t i o n out of which i t a r i s e s . With these p r i n c i p l e s a s a guide, the Federal Reserve Bank must determine the e l i g i b i l i t y of any p a r t i c u l a r paper i n the l i g h t of the circumstances i n which i t was i s s u e d , and i t s proceeds disposed o f , " Very t r u l y yours, Governor, « L e t t e r to Chairman of each bank.
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