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Covering Sec,^4 Clause
Regulation No
{b }
This clause reads as follows:
"Every Federal reserve bank shall have power:
(b)
To buy and sell, at home or abroad, bonds and
notes.of the United States, and bills, notes, revenue
bonds, and warrants with a maturityfrom date of pur
chase of not exceeding.six months, issued in anticipa
tion of the collection of taxes or- in anticipation of
the receipt of assured revenues by any State, county,
district, political subdivision, or municipality in
the Continental United States, including irrigation,
drainage and reclamation districts, such purchases to
be made in accordance with rules and regulations pre
scribed by the Federal Reserve Board,"
The power to buy and sell bonds and notes of the United
States will be treated in a separate regulation.
For brevity's sake, the expression "warrant", when used
in this regulation, shall be construed to mean: "bills,
notes, revenue bonds and warrants with a maturity from date
of purchase of not exceeding six months", and the expression
"municipality" shall be construed to mean: "State, county,
district, political subdivision or municipality, in the Con
tinental United States, including irrigation, drainage, and
reclamation districts."
In order to be eligible for purchase by a Federal Re
serve Bank, "warrants" must be issued
2
First:
In anticipation of the doiJaction o / tuycefi oir
in anticipation, of the receipt cf assured r e v enue by p. ’’mu*’
nicipaiity" j and the t^xes or
revenues*, against
which such "warrants" have been issued, must be due and pay#
able on or before the date of maturity ef such "'warrants",
Taxes shall be considered as due and payable on the
last day on which they may be paid without penalty.
Second:
By a "municipality" which has been in exist-*
ence for a period of no less than ten years and which for a
period of no less than ten years previous to the purchase
has not defaulted in the payment of any part of either prin
cipal or interest of any funded or other debt authorized to
be contracted by it, and whose net funded indebtedness does
not exceed ten per centum of the valuation of its taxable
property, tc_be ascertained by the last preceding valuation
of property for the assessmentt of taxes.
In computing such "net" funded indebtedness, funded debt
incurred for the acquisition of self-supporting property such as water works, docks, electric plants, transportation
facilities, etc. - may be deducted to the extent that such
funded debt actually is self-supporting.
Third s
No Federal Reserve Bank shall be permitted to
purchase and held an amount in excess of* 25% of the total
amount of "warrants" outstanding at any one time issued un
der the provisions of Sec. 14 (b) and actually sold by a
"municipality".
-3-
Fourth:
i
The aggregate amount invested by any Federal
Reserve Bank yn. "warrants* shall not exceed a sum e-qual to
ten per centum of the deposits of its member banks except
with the approval of the Federal Reserve Board.
Except with the approval of the Federal Reserve Board
the aggregate amount which may be invested by any Federal Re
serve Bank in "warrants" of any single municipality shall be
limited as follows:
5% of Deposits in warrahts of a municipality of ,
50.000 polulation or over
3% of Deposits in warrants of a municipality of over
30.000 population but less than 50,000
1% of Deposits in warrahts of a municipality of
30.000 population or less.
Where the polulation of a municipality cannot be exactly de
termined, the Board will give! special rulings.
this regulation is subject to such modification as the Board
may deem proper’from time to time.
In prescribing the above regulations the Federal Re
serve Board has been guided by the principle that it is
the foremost object of the Federal Reserve Act to provide for
a banking machinery which responds io the ebb and flow of com
merce and trade.
Investments of Federal Reserve Banks must,
therefore, primarily be made in commercial and banking paper.
1 'U'ti)
-4 -
Accordingly purchases of warrants by Federal Re-*
serve Banks should normally be restricted to a small proportion
of the aggregate investments, and limits should be exceeded
only when general banking policy renders it advisable.
In
any and all cases the interest of Federal Reserve Banks must
be considered first in making such investments and not that
of municipalities desiring to sell their obligations.
The Board was guided by this point of view when adding
the regulation that Federal Reserve Banks may ihvest only
in 25$ of any outstanding issue of warrants.
Federal Re-
sehve Banks ought not to be used as ready instruments created
tot the purpose of financing community requirements.
In ohder to preserve the highest degree of liquidity of
Federal Reserve Banks, investments should be made by.preference
in such warrants as command a wide market, thus enabling the
Federal Reserve Banks to dispose of these warrants whenever
it becomes desirable to reinvest in commercial paper.
The regulation prescribing that only warrants be bought
offering a definite assurance that the taxes and revenues will
be actually in hand before maturity, is in keeping with the
general policy of the Board cf restricting the Federal Reserve
Banks as far as possible to investments which are of short
maturity and self liquidating.
12/l0/l4.
@FedFRASER