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UC-NRLF

B

3

21H 151

Commercial
anting Practice
under the

Federal Reserve Act

GIFT or

Commercial

Banking Practice
under the

Federal Reserve Act

THE Law and

Regulations, the

Informal Rulings of the Federal

Reserve Board, and the Opinions of
Counsel governing Bank Acceptances,
Rediscounts,

Advances,

Market Transactions

and

Open

of the Federal

Reserve Banks.

Revised to
October, 1918

Service Department

National

Bank

in

New

Commerce
York

of

AUTHORITIES

This book has been compiled from the following
official

sources:

Federal Reserve Act
National Bank Act
War Finance Corporation Act
Regulations of the Federal Reserve Board
Federal Reserve Bulletin

First Edition, July,

1917
1918

Revised Edition. October.

Foreword
Commercial banking has been made more
efficient

through the use of acceptances.

The

National Bank of Commerce in New York has
been a pioneer in recommending a broader use
of acceptances, and this Bank is today handling
a large and increasing volume of acceptance
business.

We are engaged

in a commercial

banking busi-

ness, and, therefore, our interest in commercial

banking practice is fundamental. This volume
has been compiled to meet the needs of practical
business men and bankers the customers and
friends of the National Bank of Commerce in
New York.
The present edition is a complete revision up
to October 1918 of our first edition issued in
July 1917. We have attempted not only to revise

—

but to improve the first book.
This Bank is prepared to answer questions in
regard to commercial banking practice with particular reference to the use of acceptances. We
are constantly in touch with new developments
in the laws and rulings affecting commercial
banking, and we have complete information regarding the acceptance market.

James

S.

Alexander.
President

NewYjrk

GAMIER

TRADE ACCEPTANCE

CONTENTS
Part

I.

Bank Acceptances

Page

9

Acceptances

11

iXjeneral Statutory Provisions
J

Acceptance Policy of the Federal Reserve Board

13

16
Bank Acceptances Based on Imports and Exports
Exchange ... 29
Bank Acceptances Executed to Furnish Dollar
Bank Acceptances Based on Domestic Shipments of Goods 33
38
Bank Acceptances Secured by Warehouse Receipts
43
Investment in Acceptances by Member Banks

Part

II.

Rediscounts with Federal Reserve Banks
49

/General Statutory Provisions

General Regulations of Federal Reserve Board

53

Rediscount of Promissory Notes

56

Rediscount of Drafts and Trade Acceptances

76

Rediscount of Six Months' Agricultural Paper

90

Rediscount of Commodity Paper

96

Rediscount of Bank Acceptances

99

Part III. Advances by Federal Reserve Banks
109

General Statutory Provisions

109

JSecurity

Ill

Maturity

Part IV. Open Market Transactions
115

General Statutory Provisions
General Regulations and Rulings
Transactions in

Transactions in Bills of Exchange and Trade Acceptances

Index

115

Bank Acceptances

118
.

123
128

PART

I.

Bank
Acceptances

PART

I.

Bank Acceptances
The term "acceptance" designates a draft or bill
of exchange drawn to order, payable at a definite

^A«eptMce w

time after date or sight, the obligation to pay which
has been accepted by an acknowledgment thereon
written or stamped and signed (generally across the
face of the instrument) by the party on whom the
This acknowledgment, which genbill is drawn.
erally consists merely of the word "accepted" followed by signature and date, constitutes the agreement of the acceptor to pay the draft at maturity
according to its tenor, without qualifying conditions. To be negotiable, such an accepted bill must
be for a definite amount and must be payable in

money.

An ordinary

"trade acceptance"

is

created when,

Bank acceptance,

for example, the seller of merchandise draws a
draft for the purchase price on the purchaser and
The purchaser,
the purchaser accepts the draft.
however, may enter into an agreement with his
bank whereby the bill is drawn on the bank and is
accepted by it for his account instead of by the purchaser himself. Such a draft, when accepted, be-

comes a "bank acceptance." The Federal Reserve
Board has defined a bank acceptance as "a draft or
bill of exchange of which the acceptor is a bank or
trust company, or affirm, person, company, or corporation engaged in the business of granting bankacceptance credits."
Bank acceptances are used largely in financing
international trade and domestic transactions involving major staple commodities. They hold a

Definition,

ers'

u$e of bank
acce P tance8 -

10

,

Com me rcial Banking Practice

preeminent place among credit instruments and
offer a means of investment in which the credit risk
has practically been eliminated. This is due to the
fact that direct responsibility for their payment
rests on banking institutions whose credit is generally
Coverture of
acceptances.

and widely known.

a meeting of the leading banks and bankers
New Yor Boston? Philadelphia, and other
QJf
cities, held at the National Bank of Commerce in
New York, August 14, 1918, it was resolved that:
"The accepting bank shall require from its clients
that it be placed in funds to meet acceptances on

j^

^

day of maturity

either

by

deposit of clearing house funds one
day prior to maturity, or
"(b) The deposit of cash or check on the Federal
Reserve Bank of New York on the day of
maturity, or
" (c) Debit to the account of the bank's client on
day of maturity against funds cleared on,

"(a)

The

or prior to, such date."

11

General Statutory Provisions
Section 13 of the Federal Reserve Act, as
amended, provides as follows with regard to the
power of national banks as members of the Federal
Reserve System to accept drafts or bills of exchange
:

"Any member bank may

accept drafts or

bills

of

Acceptance of

exchange drawn upon it having not more than six
months' sight to run, exclusive of days of grace,

drafts -

"I.
Which grow out of transactions involving
the importation or exportation of goods or

Against imports
an
exports *

Which grow out of transactions involving
"II.
the domestic shipment of goods provided shipping

Against domestic

;

documents conveying or securing
at the time of acceptance

;

title

$

ipmen

s*

are attached

or

"III. Which are secured at the time of acceptance by a warehouse receipt or other such document
conveying or securing title covering readily market-

Against goods
warehouse

in

-

able staples.

"No member bank shall accept, whether in a foreign or domestic transaction, for any one person,
company, firm, or corporation to an amount equal
at any time in the aggregate to more than ten per
centum of its paid-up and unimpaired capital stock
and surplus, unless the bank is secured either by
attached documents or by some other actual security growing out of the same transaction as the
acceptance and

on acceptances
one interest

Limit
for

-

;

"No bank shall accept such bills to an amount
equal at any time in the aggregate to more than
one-half of its paid-up and unimpaired capital
stock and surplus:
"Provided, however, that the Federal Reserve
Board, under such general regulations as it may

Limit on aggregate
acceptances,

Extension of limit.

Commercial Banking Practice

12

prescribe,

which

shall

apply to

all

banks alike

re-

gardless of the amount of capital stock and surplus,
may authorize any member bank to accept such bills
to an amount not exceeding at any time in the
aggregate one hundred per centum of its paid-up
and unimpaired capital stock and surplus
Limit on aggregate
domestic acceptances.

Acceptances for
exchange.

dollar

"Provided, further, that the aggregate of acceptances growing out of domestic transactions shall in
no event exceed fifty per centum of such capital
stock and surplus.

Any member bank may accept drafts or
of exchange drawn upon it having not more
than three months' sight to run, exclusive of days
of grace, drawn under regulations to be prescribed
by the Federal Reserve Board by banks or bankers
in foreign countries or dependencies or insular possessions of the United States for the purpose of furnishing dollar exchange as required by the usages
of trade in the respective countries, dependencies,
or insular possessions.
"IV.

bills

Acceptances for one

bank

limited.

"Provided, however, that no member bank shall
accept such drafts or bills of exchange referred to

paragraph for any one bank to an amount
exceeding in the aggregate ten per centum of the
paid-up and unimpaired capital and surplus of the
accepting bank unless the draft or bill of exchange is accompanied by documents conveying or
securing title or by some other adequate security

in this

Limit on aggregate
of such acceptances.

"Provided, further, that no member bank shall
accept such drafts or bills in an amount exceeding
at any time the aggregate of one-half of its paid-up
and unimpaired capital and surplus."
(Federal Reserve Act, Section 13.)

13

Acceptance Policy of the Federal
Reserve Board

GENERAL STATEMENT
The Federal Reserve Board

desires to avoid the
regulations covering acceptances.
adoption of rigid
The development of an efficient acceptance system
will be facilitated if the banks of the United States
assimilate and voluntarily adopt the underlying
principles by which the Board must be guided, without requiring inflexible rules.

Conservation of the strength of the Federal Re-

System requires
That it be possessed of short paper well
(a)

serve

scattered in

days)
(b)

its

maturities

ri

J

>

S& 3t^
i

serve System.

(not exceeding ninety

;

That when

this

paper matures

it

can be act-

ually collected
(c) That the supply of new paper coming into
the market can be controlled to a certain degree by
an advance or decline in the rate of interest at which
bankers' acceptances are bought.

Agreements to grant credits for an extended
period by the purchase of 90-day paper or by 90day acceptances ought to be based upon transactions connected directly with the purchase and sale
of goods and the intermediate process of manufacturing. Credits so extended should relate to the
[liquid] resources of the borrowing concern and
should not be granted for the purpose of furnishing
working capital or for the temporary financing of

permanent investments.

Character of^

1

14

Commercial Banking Practice
These transactions should be of an individual
They call for direct contact between
character.
banker and borrower, and syndicate credits should
be avoided. Agreements by bankers to furnish one
or two year money at a definite rate of interest
against bo-day paper or acceptances to be used to
finance themselves should not be countenanced,
either openly or in the form of exchange of paper
between bankers.
(Memorandum issued by Federal Reserve Board, Pages
257, 260, April, 1918, Bulletin; printed in full at Pages 257260.)

SYNDICATE ACCEPTANCE CREDITS
Policy of Federal

Reserve Board.

The Federal Reserve Board has issued a memorandum stating its policy in dealing with acceptances drawn under credits extending over a period
of one or two years.

Authorization.

Duration of
credits.

Rate.

In this memorandum the Board authorized the
banks of New York, during a period which may be
declared ended at any time, to proceed upon certain
principles which may be summed up as follows
Acceptance credits opened for periods in
(1)
excess of 90 days should only, in exceptional cases,
extend over a period of more than one year, and
in no case for a time exceeding two years.
Banks which are members of groups open(2)
ing these credits should not buy their

own

accept-

ances, and where an agreement is made with the
drawer for purchase of acceptances for future de-

be a fixed one, but should
ruling at the time of the sale.
the rate

livery, the rate should not
Character.

be based upon
Transactions covered by these credits
(3)
should be of a legitimate commercial nature, and
acceptances must be eligible according to the rules
and regulations of the Board.

Bank Acceptances
Whenever

15

T

syndicates are formed for the £ pJpr( D of
J
_
Federal Reserve
„
purpose oi granting acceptance credits for more Board,
than moderate amounts, 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 the Federal reserve bank subject to the approval in each case of
the Federal Reserve Board.
It must be understood in passing upon these Quality and
transactions that not only quality but also quantity S^offinf
must be the controlling factors. The aggregate of factors,
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 might look with favor 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 opinion of the Federal Reserve Board, unduly large.
(Announcement of Federal Reserve Board, Page 257, April,
(4)
x
'

n

1918, Bulletin.)

1

Sank Acceptances Based on
Imports and Exports

CHARACTER
Statutory Provisions
4

'Any member bank may accept drafts or bills of
which grow out of transactions

exchange

.

.

.

involving the importation or exportation of goods."
(Federal Reserve Act, Section 13.)

Opinions and Rulings
Determination of Character
Acceptances Are Based.

of

Transactions on Which

Held not to be necessary that the specific goods
covered by an acceptance based upon an import or
export transaction must be identified at the time of
the acceptance.
(Informal Ruling, Page 405, December, 1915, Bulletin.)

Good

faith must be relied upon to a large extent
determining whether an acceptance is based upon
a transaction involving the importation or exportation of goods.
member bank would be justified
putting on the legend "this acceptance is based
in
on a transaction involving the importation or exportation of goods," provided it is satisfied the statement by its customer is made in good faith.
in

A

(Informal Ruling, Page 406, December, 1915, Bulletin.)

Bank Acceptances

17

Member banks may

best protect themselves in
determining whether acceptances are based upon
the exportation or importation of goods by stipulating the right at times to ask for substantiation of

assurances from a customer.
(Informal Ruling, Page 406, December, 1915,
Transaction Must
of

Itself

Involve

assurances.

Bulletin.)

Import

or

Export

Goods.

A transaction, in order to be the basis

of a draft J ran8ac t ion8
n

for acceptance by a member bank,
must itself involve the importation or exportation
of goods.
transaction wholly independent of the
transaction covering the importation or exportation
of goods is not sufficient basis for an acceptance, under the terms of section 13 (relating to acceptances
against imports or exports).
(Opinion of Counsel, Page 276, September, 1915, Bulletin.)
or

Proof of

bill eligible

e P eD

imp o r t or export
not sufficient basis,

A

Where the

contract between a seller of goods who
draws a draft and the purchaser is entirely independent of the contract for the export of the goods,
the draft would have to be treated as drawn in a
domestic transaction and would have to be accompanied by shipping documents or secured by warehouse receipts or other similar documents conveying and securing title when accepted by the drawee

Dra

t$

tre * ted

j
domestic
transact,ons -

bank.
(Informal Ruling, Page 435, May, 1918, Bulletin.)

A

drafts accepted by a o^jon *° af|$
member bank in an export transaction should be a $ in domestic
given the option, with the consent of the accepting transactions,
bank, to secure such drafts in the manner required
of those drawn in domestic transactions if he wishes
to use the proceeds derived from the sale of the
goods exported for purposes other than the payment of such acceptances.
(Opinion of Counsel, Page 439, May, 1918, Bulletin.)

dealer having

drawn

Commercial Banking Practice
cceptance at
istance of

sporter.

If a drawee bank accepts at the instance of the
purchaser of goods, the purchaser having a contract
to export such goods, the drafts would grow out of
a transaction involving the export of goods and
could be accepted by the drawee bank under authority of section 13.
(Informal Ruling, Page 435, May, 1918, Bulletin.)

itention to

xport ultimately
ot

sufficient basis.

Where a domestic corporation "A" enters into a
contract with another domestic corporation "B" to
furnish material to be used by "B" in the manufacture of products which "B" is under contract to export, the mere fact that the material furnished is
ultimately intended for export in some form can
not be said to merge the two transactions into one.
The transaction between "A" and "B" could not be
said to involve the exportation of goods.
(Opinion of Counsel, Page 276, September, 1915, Bulletin.)

ale to

Allied

urchasing Comlission involves

xport.

A

accept drafts drawn for
financing the sale of goods to one
the purpose of
of the allied purchasing commissions, such goods
to be delivered aboard ship and paid for within a
reasonable time thereafter.
It is held that the sale of goods in the manner
indicated comes within the terms of section 13, authorizing a member bank to accept drafts "growing
out of transactions involving the importation or exportation of goods," even though title to the goods
be transferred to the foreign purchaser before the
shipment out of the United States actually begins.
The transaction against which the draft is drawn
involves the direct sale to a foreign purchaser, and
the fact that the sale itself may be consummated before the exportation of the goods actually commences is immaterial, provided that the transaction
is bona fide, and that the accepting bank has no
reason to believe that the purchaser will divert the
goods from their foreign destination.
(Informal Ruling, Page 878, November, 1917, Bulletin.)

member bank may

Bank Acceptances
Acceptance of Drafts Prior
Imported or Exported.

to

Purchase or Sale

19
of

Goods

In interpreting the word "involved" in connection with the importation or exportation of goods,
upon which an acceptance has been based, it is held

Goods purchased
°

acceptance.

that goods may be purchased and shipped subsequent to the time of the first acceptance, provided
that there is a definite bona fide contract for the
shipment of the goods within a specified and reasonable time.
(Informal Ruling, Page 405, December, 1915, Bulletin.)

Section 13 of Federal Reserve Act construed to
justify a national bank in accepting a draft drawn
upon it in settlement of advances for cotton being
accumulated by cotton buyers for export. The fact
that there is a temporary delay in actual shipment
of goods is immaterial.
(Informal Ruling, Page 458, September, 1916, Bulletin.)

Delay

in

Immaterial!

national bank may properly accept a draft, ^ c " p ta "„ eu8re
ns
drawn for the purpose of importing goods whether importations
or not the sale of the goods under consideration has of * ood 'actually been consummated at the time of the acceptance of the draft, if the accepting bank is assured that the proceeds of the draft will ultimately
be used solely for the purpose of financing a transaction involving the importation of goods. It is not
necessary that the goods to be sold be identified at
the time of acceptance. The accepting bank, however, must be reasonably sure that the draft is
drawn for the purpose of financing a transaction involving the importation or exportation of goods,
and that its proceeds will be used for that purpose.

A

l

t

(Informal Ruling, Page 527, July, 1917, Bulletin.)

A

member bank would be

justified, if fully se-

cured, in accepting drafts drawn by a local cottonbuying firm having a contract to sell to foreign buyers if the transaction, after having been made in

t

^

rmct

p

t

?3 i£j
fi

Commercial Banking Practice
good

faith, ultimately resulted in the sale of the

cotton to an American instead of a foreign purchaser. It was assumed in connection with this interpretation of section 13 that the bank had received
permission from the Board to accept drafts or bills
of exchange drawn upon it; that the cotton buyers
had a contract to sell cotton to a firm of Liverpool;
that they held the cotton subject to shipping receipt of the Liverpool firm; and that because of
freight rates and shipping conditions the Liverpool
firm changed its policy and directed the sale of the
cotton.
(Informal Ruling, Page 13, January, 1916, Bulletin.)
afts

drawn

linst collateral

acceptances.

eligible for

ceptance.

An acceptance house which has purchased an acceptance based on the importation or exportation of
goods desires to reimburse itself by drawing a bill
upon a national bank, pledging as collateral securIt is held
ity for the bill the original acceptance.
bill cannot properly be said to grow
that the new
out of the original export transaction in the sense
contemplated by the Federal Reserve Act.
national bank is not authorized to accept a
draft drawn under the above circumstances because
it is not an acceptance growing out of a transaction
involving the importation or exportation of
goods, nor drawn by a bank or banker located in a
foreign country, nor does it grow out of a transaction involving the domestic shipment or storage of
goods.

A

(Informal Ruling, Page 29, January, 1917, Bulletin.)

Acceptance Agreements of Dealers in Same Goods for
Export and Domestic Sale.
hen acceptance
jreements
iould
isis

show
of drafts.

Where

who

purchase of
goods for export
and for domestic use desires to finance the purchase
and sale of goods to be exported, his agreement with
a member bank accepting such drafts should show:

the

is

engaged

same character and

class of

a dealer

in the

Bank Acceptances

21

that he has a contract for the export of the

(a)

goods
that the total

(b)

amount

of drafts under such

credit will not exceed the aggregate

amount

in-

volved in the export transaction
that the proceeds of the drafts are to be
(c)
used in connection with the export transaction and
(d)
that the proceeds of the sale of goods exported will be applied in payment of the acceptances unless the dealer has in the meantime placed
the bank in funds to meet them at maturity, or has
secured such acceptances in the manner required of
domestic acceptances.
(Opinion of Counsel, Page 438, May, 1918, Bulletin.)
;

Or

drafts should

e secure

'

Acceptances against Goin and Bullion.

coin is "goods" within the meaning of section 13 of the Federal Reserve Act.
(Informal Ruling, Page 29, January, 1917, Bulletin.)

Gold

Gold bars may be properly considered

as goods.

Gold coin,

Bullion.

(Informal Ruling, Page 29, January, 1917, Bulletin.)

MATURITY
Statutory Provisions
Acceptances of member banks against imports
and exports are limited to drafts "having not more
than six months' sight to run, exclusive of days of

Maturity,

grace."
(Federal Reserve Act, Section 13.)

Opinions and Killings
Duration

A

of

Acceptance Credits.

national bank

is

held to be authorized to enter

Duration

,ng
ce
into an agreement having more than six months to " n ^
run, by the terms of which it obligates itself for a
period of time specified in the agreement to accept

8IX

Commercial Banking Practice
drafts drawn upon it, provided such drafts grow out
of transactions involving the importation or exportation of goods, and that the individual drafts have
not more than six months' sight to run. This distinction is emphasized: "While a letter of credit or
credit agreement may lawfully be made by a national bank which will extend by its terms for a

period exceeding six months, the agreement must
not be of such a character as will impose upon the
holders of drafts accepted thereunder any obligation to renew such drafts so that the period of acceptance shall exceed six months in duration as to

any

specified draft."
(Informal Ruling, Page 269, September, 1915, Bulletin.)

indicate

:ceptance
edits.

For statement of policy of Federal Reserve
Board with regard to syndicate acceptance credits
having a duration of several years, see "Syndicate
Acceptance Credits, "pages 14-15, above.
Renewal

enewals for
easonable periods.

of

Bank Acceptances.

Upon payment of an acceptance the accepting
bank may for a reasonable period accept new
drafts for the financing of the original transaction,
even after the shipment and delivery of the goods,
provided such renewals be stipulated in the original contract as an incidental condition of the transaction of importation or exportation upon which the

acceptance

is

based.

(Informal Ruling, Page 405, December, 1915, Bulletin.)
lenewals against
mports on docks.

of a private banking house made
for a bag company, stating in the body of the draft
that it is for burlap from Calcutta stored on the
docks, might be continued or renewed while the

The acceptance

goods are on the dock.
(Informal Ruling, Page 30, January, 1917, Bulletin.)

Bank Acceptances

AMOUNT BANK MAY ACCEPT FOR
ONE INTEREST
Statutory Provisions

"No member bank shall accept, whether in a foreign or domestic transaction, for any one person,
company, firm, or corporation to an amount equal
at any time in the aggregate to more than ten per
centum of its paid-up and unimpaired capital stock
and surplus, unless the bank is secured either by
attached documents or by some other actual security
growing out of the same transaction as the acceptance."

Ten per
cent himt *

Exception,

(Federal Reserve Act, Section 13.)

Opinions and Killings
Drafts accepted by foreign correspondents at the
request and under the guarantee of a national bank
in the United States should be reported as a direct
liability of such national bank, and treated as subject to the limitations imposed by the Federal Reserve Act on the acceptance power of national

Acceptances
correspondent
under guarantee
of national

bank

banks.
(Opinion of Counsel, Page 311, April, 1918, Bulletin.)

Exemption from Ten Per Cent Limit.

The

ten per cent limit upon the amount of acceptances which any member bank might make for
any one person, company, firm, or corporation does
not apply if "the bank is secured either by attached
documents or by some other actual security growing out of the same transaction as the acceptance.
•

•

•"

Secured

u.::.,i

If documents which were attached at the time of
the acceptance are surrendered and no other security growing out of the same transaction is substituted, the ten per cent limit will apply. The ac-

Accepting

remainTecured.

'

Commercial Banking Practice
cepting bank must remain secured in the manner
prescribed during the life of the acceptance in order
to be exempt from the ten per cent limit.
(Informal Ruling, Page 286, April, 1917, Bulletin.)

r

hat constitutes

ctual security

rowing out of
ime transaction.

The only doubtful question is as to what constitutes "some other actual security growing out of
the same transaction as the acceptance." The ten
per cent limit does not apply where the acceptor
holds
1.

Shipping documents.

2.

Warehouse

3.

receipts.
receipts which do not enable the borTrust
rower to obtain the goods for his own use.

cent limit does apply where the bank
holds merely the ordinary trust receipt which gives
it only a lien on the goods in the hands of the purchaser or on their proceeds.
(Informal Ruling, Page 286, April, 1917, Bulletin.)

The ten per

rrust
is

receipts

actual security.

If an acceptance is secured by shipping documents which are surrendered by the acceptor for a
trust receipt which permits the purchaser of the
goods to retain control of the goods, the accepting
bank cannot be said to be secured "by some other
actual security" as provided in section 13 of the
trust receipt, however,
Federal Reserve Act.
which does not permit the purchaser to procure control of the goods, may properly be said to be actual
security within the meaning of the Act.
(Opinion of Counsel, Page 881, November, 1917, Bulletin.)

A

Relation of United States Revised
to the Ten Per Gent Limit.

Statutes,

Section

5200,
When

section

5200

applies.

A

legally purchase its own
acceptances, but such a transaction is equivalent to
a loan or advance to the customer for whom the ac-

member bank may

Bank Acceptances

25

ceptance was made and the liability of such customer becomes subject to the limitations of section
5200, Revised Statutes.
The limitations imposed by section 5200, Re- ^JJJ*
vised Statutes, on the amount of money which may
be borrowed by any individual from a member bank
do not apply to acceptances of such bank.
(Opinion of Counsel, Page 680, December, 1916, Bulletin.)

Where

a national bank has already loaned 10 per £"'/££"
capital and surplus to a certain company, to bans,
it may, while the loan is still outstanding, obligate
itself as acceptor on a draft drawn by the same
cent of

its

comjmny.
however, the member bank discounts its own
acceptance under the foregoing circumstances, it
must treat the transaction as a loan and not as an
acceptance, and could not in that case lend to, and
accept for, the same firm in an aggregate amount in
excess of the 10 per cent prescribed by section 5200.
If,

Exception,

(Informal Ruling, Page 197, March, 1918, Bulletin.)

The ten per cent limitation imposed by section
5200 of the Revised Statutes is not intended to apply to the mere acceptance of a bill of exchange,
but the provisions of section 5200 would apply to
the indebtedness arising between the drawer of the
bill and the accepting bank in case the drawer fails
to furnish funds with which to meet the acceptance
at maturity.
(Informal Ruling, Page 64, February, 1916, Bulletin;
peated from Page 269, September, 1915, Bulletin.)

re-

Note: The limitations imposed by the Federal Reserve
Act on the amount a bank may accept for any one interest
a Pply to drafts "whether in a foreign or domestic transaction."
The 10 per cent limit, therefore, applies to the aggregate of
both domestic and foreign drafts accepted for one interest.

When drawer
fails to

provide

funds to meet
acceptance.

Commercial Banking Practic

26

AGGREGATE AMOUNT BANK

MAY AGCEPT
Statutory Provisions
Fifty per

cent limit.

Acceptances
up to 100 per cent.

"No bank shall accept such bills to an amount
equal at any time in the aggregate to more than
one-half of its paid-up and unimpaired capital stock
and surplus:
"Provided, however, that the Federal Reserve
Board, under such general regulations as it may prescribe, which shall apply to all banks alike regardless of the amount of capital stock and surplus, may
authorize any member bank to accept such bills to
an amount not exceeding at any time in the aggregate one hundred per centum of its paid-up and
."
unimpaired capital stock and surplus.
.

.

(Federal Reserve Act, Section 13.)

Regulations of Federal Reserve Board
Application
for

power

the
Under the provisions of the law
Federal Reserve Board has determined that any
member bank, having an unimpaired capital equal
to at least twenty per centum of its paid-up capital,
which desires to accept drafts or bills of exchange
up to an amount not exceeding at any
time in the aggregate one hundred per centum of
its paid-up and unimpaired capital stock and surplus, may file an application for that purpose with
the Federal Reserve Board. Such application must
be forwarded through the Federal reserve bank of
the district in which the applying bank is located.
The Federal reserve bank shall report to the
Federal Reserve Board upon the standing of the
applying bank, stating whether the business and
banking conditions prevailing in its district warrant the granting of such application.
.

to

accept np to
100 per cent.

.

Report on
application.

.

.

.

.

Bank Acceptances

27

The approval of any such application may be
rescinded upon 90 days' notice to the bank af-

ev "* al of

approva , *
^

fected.
(Regulations

of

Federal

Reserve

Board,

Regulation

C,

Series of 1917, A, II.)

Opinions and Rulings
Authority from the Federal Reserve Board is
not necessary for a member bank to undertake acceptance business, unless the bank wishes to exceed
50 per cent of its capital and surplus.

Permission to

50 per cent
not refi uired -

(Informal Ruling, Page 126, July, 1915, Bulletin.)

Drafts accepted _ by _
foreign correspondents at
4"
rp
°
J
1
the request and under the guarantee 01 a national
bank in the United States should be reported as a
direct liability of such national bank, and should be
treated as subject to the limitations imposed by the
Federal Reserve Act on the acceptance power of

Acce P tance8

of

correspondents
under guarantee
of nationaI

banL

national banks.
(Opinion of Counsel, Page 311, April, 1918, Bulletin.)

When

a member bank purchases its own acceptance before maturity such acceptance need not be
included in the aggregate of acceptances authorized by section 13.

P ur <*a*e

of

acceptance,

(Opinion of Counsel, Page 397, August, 1916, Bulletin.
See also "Purchase by National Bank of Its Own Acceptances," pages 45-46, below.)

The

imposed by section 5202, Revised Statutes, on the liabilities incurred by any
national bank do not apply to acceptances of such
limitations

banks.
{Opinion of Counsel, Page 680, December, 1916, Bulletin.)

Lim

^°5 2 0?
rs

of

Commercial Banking Practice

28
General

By way
(1)

A

summary it may be
member bank may not accept

of general

greater amount than 50%

of

its

capital

plus (unless the Federal Reserve
thorized it to accept 100%)

said
bills to

and

a

sur-

Board has au-

;

(2)
shall in

The amount

of

domestic

bills

accepted

no event exceed 50% of capital and surplus;
Acceptances purchased by the accepting
(3)
bank are exempt from the above limitations.

29

Bank Acceptances Executed

to

Furnish Dollar Exchange

CHARACTER
Statutory Provisions
accept drafts or bills of c ce p "" $
f r do
o
having not more than three exchange,

"Any member bank may

t

1

exchange drawn upon it
months' sight to run, exclusive of days of grace,
drawn under regulations to be prescribed by the
Federal Reserve Board by banks or bankers in foreign countries or dependencies or insular possessions of the United States for the purpose of furnishing dollar exchange as required by the usages of
trade in the respective countries, dependencies, or
insular possessions.
(Federal Reserve Act, Section 13.)

Regulations of Federal Reserve Roard

Any member bank desiring
ii
p

iii
drawn by banks or bankers

accept drafts
l
in foreign countries or
dependencies or insular possessions of the United
States for the purpose of furnishing dollar exchange shall first make an application to the Federal Reserve Board setting forth the usages of trade
in the respective countries, dependencies, or insular
possessions in which such banks or bankers are lo•

to

•

Application for
permission
t0 accept
.

cated.

If the Federal Reserve Board should determine
that the usages of trade in such countries, dependencies, or possessions require the granting of the

c ndUi on,

;

_

_

of approval.

30

Commercial Banking Practice
acceptance facilities applied for, it will notify the
applying bank of its approval and will also publish
in the Federal Reserve Bulletin the name or names
of those countries, dependencies, or possessions in

which banks or bankers are authorized to draw on
member banks whose applications have been approved for the purpose of furnishing dollar exchange.

The Federal Reserve Board reserves the right to
modify or on 90 days' notice to revoke its approval
either as to any particular member bank or as to
any foreign country or dependency or insular possession of the United States in which it has authorized banks or bankers to draw on member banks for
the purpose of furnishing dollar exchange.
(Regulations

of

Federal

Reserve

Board,

Regulation

C,

Series of 1917, B, II.)

Announcements
Purpose
of law.

of Federal

The purpose of this act and the regulation made
pursuant thereto was to enable the American banks
to provide dollar exchange in countries where the
check is not the current means of remittance in payment of foreign debts, but where the three months'
bankers' draft is generally used for that purpose.
(Announcement of Federal
December, 1916, Bulletin.)

Countries whose
trade usages do
not require such
acceptances.

Reserve Board

Reserve

Board,

Page 665,

The Board is informed that the bankers' custom
of selling three months' drafts in preference to
checks originated in countries where the mail connections were irregular and the foreign-exchange
market was a limited one, and where it would have
been difficult for the drawing banker to be certain
that he could find a cover against the checks drawn
by him in time to forward it by the same mail,
whereas, in drawing a three months' draft, he would
feel assured of being able to forward remittances
before his obligation fell due. Such conditions do

Bank Acceptances

81

not exist in relations between England and France

and the United

States.

(Announcement of Federal
December, 1916, Bulletin.)

Reserve

Board,

Page 665,

Reserving the right to modify or revoke its approval on 90 days' notice, the Board has decided to
permit member banks to accept foreign drafts
drawn upon them by banks or bankers in the following countries: Porto Rico, Santo Domingo,
Costa Rica, Peru, Chile, Brazil, Venezuela, Argentina,

and

1™*^? U
warrant such
acce P tances
-

Bolivia.

understood that such drafts are to be drawn
for the purpose of furnishing dollar exchange as
required by the usages and trade in the respective
It

is

countries.

(Announcement of Federal
December, 1916, Bulletin.)

The following named

Reserve

Board,

Page 665,

countries have been added

to the above list: Colombia, Nicaragua,

Ecuador,

Trinidad, and Uruguay.

MATURITY
Statutory Provisions

Member banks may accept drafts drawn to Maturity not
furnish dollar exchange "having not more than ^mottii*.
three months' sight to run, exclusive of days of
grace.

..."

(Federal Reserve Act, Section 13.)

AMOUNT MEMBER BANK MAY ACCEPT
FOR ONE INTEREST
Statutory Provisions

"No member bank
bills

Ten
shall accept such drafts or

of exchange referred to in this paragraph for

per

cent limit.

Commercial Banking Practice

n

any one bank to an amount exceeding in the aggregate ten per centum of the paid-up and unimpaired
capital and surplus of the accepting bank unless the
draft or bill of exchange is accompanied by documents conveying or securing title or by some other
adequate security.

.

.

."

(Federal Reserve Act, Section 13.)

AGGREGATE AMOUNT MEMBER

BANK MAY ACCEPT
Statutory Provisions
Fifty

per

:ent limit.

"No member bank

shall accept such drafts or

an amount exceeding at any time the aggregate of one-half of its paid-up and unimpaired capital and surplus."
bills in

(Federal Reserve Act, Section 13.)

Opinions and Rulings
Separate limits
>n the

two

classes of

acceptances.

"The 50 per cent limit imposed upon the amount
of drafts which a member bank may accept for the
purpose of furnishing dollar exchange is separate
and distinct from and not included in the limits imposed by section 13 upon the amount of drafts or
bills of exchange drawn against the shipment of
goods or against warehouse receipts covering readily marketable staples,

which a member bank

may

accept."

Member banks may therefore accept such bills
even though their acceptances for other purposes
aggregate 50% (or 100%) of capital and surplus.
(Opinion of Counsel, Page 528, July, 1917, Bulletin.)
Section 5202
not applicable.

The limitations imposed by section 5202, Revised Statutes, on the liabilities incurred by any
national bank do not apply to acceptances of such
banks.
(Opinion of Counsel, Page 680, December, 1916, Bulletin.)

S3

Bank Acceptances Based on Domestic Shipments of Goods

CHARACTER
Statutory Provisions

"Any member bank may

accept drafts drawn
upon it
which grow out of transactions
involving the domestic shipment of goods provided
shipping documents conveying or securing title are
."
attached at the time of acceptance.
.

.

.

.

Acceptances

me$IC
Irade.

.

(Federal Reserve Act, Section IS.)

Opinions and Rulings
Shipping Documents.

Under the provision
izes any member bank

of section 13, which authorto accept drafts based upon
domestic shipments of goods, provided shipping
documents conveying or securing title are attached,
such documents must be made out or indorsed so as
to

convey or secure

title to

Character
of documents.

the accepting bank.

(Opinion of Counsel, Page 198, March, 1918, Bulletin.)

A

provision of section 13 which authorizes any
member bank to accept drafts based upon the
domestic shipment of goods, provided shipping
documents are "attached," should not be construed
so as to require that the documents be physically
fastened to the draft. It is sufficient if the accepting bank has possession of the documents at the
time of acceptance. If placed in possession of the
bank's agent and under control of the bank, such
documents could clearly be considered as in its
possession.
(Opinion of Counsel, Page 765, October, 1917, Bulletin.)

Documents not
[^physically
attached,

Commercial Banking Practice
Transaction Need Not Involve Sale of Goods.

A member bank may properly accept a draft
drawn against the shipment of goods from a corporation to its agent or branch even though no sale of
the goods is involved in the transaction.
In any case, where a draft is drawn against a
shipment of goods in a transaction which does not
involve the sale of those goods, the maturity of the
draft should approximate the duration of their
transit.
In such a case the law contemplates that
the acceptance of the draft should be for the purpose of financing the shipment, and that it should
not be the means of furnishing a credit for any other

purpose.
(Informal Ruling, Page 690, September, 1917, Bulletin.)

Acceptance Must Arise Out

of

Actual Transaction.

A

draft drawn by the purchaser of the goods
against a national bank is not eligible for acceptance by that bank merely because it is secured by a
bill of lading covering the goods bought.
The law contemplates some actual connection between the acceptance of the draft and the transaction involving the sale and shipment of the goods
that is, it was evidently intended that the draft
should be drawn to finance that transaction. If a
seller ships goods and mails the bill of lading to the
purchaser and on arrival of the bill of lading the
purchaser draws on his own bank, attaching the bill
of lading as security, and offers it for acceptance,
the transaction is merely a straight loan to the
drawer secured by a bill of lading. As such it would
not come within the spirit of the provisions of section 13.
(Opinion of Counsel, Page 380, May, 1917, Bulletin.)

Retention or Release of Documents against Acceptance.

Question is whether it is necessary, where a domestic acceptance is based upon a bill of lading, that
the bank retain the bill of lading or other collateral

Bank Acceptances

35

during the life of the acceptance, or may the bank
release the bill of lading after acceptance.
Also,
whether the same rule will apply in case the acceptis secured by a warehouse receipt.
Inasmuch as the statute merely requires the accepting bank to be secured in domestic transactions
by shipping documents or warehouse receipts at the
time of acceptance, the bank would no doubt have
the right, if it became necessary to do so, to release
either the shipping document or the warehouse re-

ance

provided the draft or drafts accepted for one
person did not exceed 10 per cent of the capital
and surplus of the accepting bank. This is a question, however, which should be determined by the
ceipt,

bank

itself.

no doubt necessary in some instances for the
bank to release the shipping documents under some
agreement with its customer in order that the transaction may be consummated. There would seem to
It

is

Release of
h ,l,e

™"

J8

much

less reason for releasing the warehouse reand the banks might very properly adopt the
rule not to release warehouse receipts other than in
exceptional cases. In any event, this is purely a
matter of agreement as between the bank and its
customers.
The Federal reserve bank in redis-

be

ceipts,

may reasonably take into
consideration the question whether or not they are
secured or unsecured at the time they are offered
for rediscount.
(Informal Ruling, Page 634, July, 1918, Bulletin.)
counting such acceptances

MATURITY
Statutory Provisions

Any member bank may accept such drafts drawn
upon

"having not more than six months' sight to
run, exclusive of days of grace."
it,

(Federal Reserve Act, Section 13.)

Maturity not to
exceed six monihi °

Commercial Banking Practice
Opinions and Rulings
Duration
edit
r

:

agreement

more than
months.

of Letters of Credit.

While a letter of credit or credit agreement may
be lawfully made by a national bank which will extend by its terms for a period exceeding six months,
the agreement must not be of such a character as
will impose upon the holders of the drafts accepted
thereunder any obligation to renew such drafts so
that the period of acceptance shall exceed six
months in duration as to any specified draft.
(Informal Ruling, Page 269, September, 1915, Bulletin.)

ndicate

accept-

ce credits.

For statement of policy of Federal Reserve
Board with regard to syndicate acceptance credits
having a duration of several years, see "Syndicate
Acceptance Credits," pages 14-15, above.

AMOUNT BANK MAY ACCEPT FOR
ONE INTEREST

fty

per

nt limit.

See, under

"Bank Acceptances Based on Im-

ports and Exports," pages 23-25, above.

AGGREGATE AMOUNT BANK

MAY ACCEPT

Statutory Provisions
cceptances up
100 per cent.

"No bank shall accept such bills to an amount
equal at any time in the aggregate to more than
one-half of its paid-up and unimpaired capital
stock and surplus
"Provided, however, that the Federal Reserve
Board, under such general regulations as it may
prescribe, which shall

apply to

all

banks alike

re-

gardless of the amount of capital stock and surplus,
may authorize any member bank to accept such bills

Bank Acceptances

2

to an amount not exceeding at any time in the aggregate one hundred per centum of its paid-up and
unimpaired capital stock and surplus:*

"Provided, further, that the aggregate of acceptances growing out of domestic transactions shall in
no event exceed fifty per centum of such capital

Domestic acceptexcee d 50 per cent,

stock and surplus."
(Federal Reserve Act, Section 13.)

Opinions and Rulings

When

a member bank purchases its own acceptL
1
j
ance before maturity such acceptance need not be
included in the aggregate of acceptances authorized

by

_

[* T ^** e

of

" an k s own
acceptances.

section 13.

(Opinion of Counsel, Page 397, August, 1916, Bulletin.
See also "Purchase by National Bank of Its Own Acceptances," pages 45-46, below.)

The limitations imposed by section 5202, Revised Statutes, on the liabilities incurred by any
national bank do not apply to acceptances of such
banks.
(Opinion of Counsel, Page 680, December, 1916, Bulletin.)

*For regulations governing acceptance of domestic and foreign drafts up to an aggregate of 100 per cent of bank's capital
and surplus, see "Bank Acceptances Based on Imports and
Exports," pages 26-28, above.

ll^Jlllh
to

acceptances,

Bank Acceptances Secured by
Warehouse Receipts
CHARACTER
Statutory Provisions

"Any member bank may

bills of
are sewhich

accept drafts or

exchange drawn upon it
cured at the time of acceptance by a warehouse receipt or other such document conveying or securing title covering readily marketable staples."
.

.

.

(Federal Reserve Act, Section 13.)

Opinions and Killings
Eligible Security.
ir

a reh use receipts

mst be issued by
Jarebouse"!

Warehouse

receipts offered as security for bills

accepted by member banks must be issued by warehouses which are independent of the borrower.
Where a corporation is formed as a subterfuge
for the purpose of evading the spirit of the Board's
ruling, this fact should be taken into consideration
by a member bank accepting the bill and by the
Federal reserve bank to which it is offered for discount.
If the borrower exercises such control over the
corporation issuing the warehouse receipt as to give
him control over the goods in storage, the purpose
of requiring a receipt of the independent warehouseman would be defeated. The corporation is-

suing such receipt must be organized in good faith
as an independent corporation and its affairs must

Bank Acceptances

39

be administered by duly authorized officers and
agents independent of the borrower.
(Informal Ruling, Page 31, January, 1918, Bulletin; see
Page 30, January, 1917, Bulletin.)

also Informal Ruling,

The requirements of the Board appear to have
±r
been met where a separate corporation has been
created and the warehouse receipts are issued by
that corporation and not by the borrower. However, where both corporations have practically the
same officers, the manager of the warehouse appointed to execute the receipts should not be an
-*

j

,

elation between
borrower and ware-

|*

house corporation.

employee of the borrowing company, as the Board
requires that the receipts should be issued by a
company independent of the borrower, and this requirement should be met in substance as well as in
form.
(Informal Ruling, Page 862, September, 1918, Bulletin.)

A

borrowing corporation takes receipts for goods
and materials stored in a warehouse controlled by a
separate corporation engaged solely in the warehouse business, the entire stock of which is owned
by the prospective borrower.
If a representative of the accepting bank is given
control of the warehouse under a proper resolution
of the directors of the warehouse corporation, the
fact that the stock of the corporation is owned by
the borrower should not prevent the acceptance of
drafts secured by the warehouse receipts.
It should be agreed, however, that if by any future action of the warehouse corporation an attempt
is made to exercise control over the warehouse, the
representative of the acceptor should have the right
to move the goods and to place them in storage elsewhere at the expense of the warehouse corporation.
(Informal Ruling, Page 862, September, 1918, Bulletin.)

°l r 1 ° f
e h us e b

wa

acceptors'
representative,

canned goods concern proposes to place part J "eej°" e |e e ceeeipts
of its readily marketable goods and materials in

A

8

$s

Commercial Banking Practice

40

storage with a lessee of part of its premises. The
is then to issue warehouse receipts to the
owner of the goods, which receipts are to be used as
security for drafts drawn against and accepted by
a member bank.
If the premises in question are actually turned
over to the lessee under a bona fide lease, the lessee
being independent of the borrower and having entire custody and control of the goods, there would
seem to be no objection to a member bank accepting drafts against the security of warehouse receipts
issued by such lessee.
It should, however, be expressly understood and agreed that the borrower
shall not have access to the premises except with the
permission of the lessee and that he shall exercise no
control of any sort over the goods against which
warehouse receipts are issued. The warehouse receipts must, of course, be in form to properly convey and secure title to the bank.
(Informal Ruling, Page 634>, July, 1918, Bulletin.)
lessee

Receipt of custodian of wool as

warehouse

receipt.

Acceptance of
against
sugar in bond.

drafts

It being understood that wool is stored in buildings under control of custodian entirely independent of borrower, custodian's certificate or receipt,
if issued in proper form to convey or secure title,
may be treated as a warehouse receipt within the
meaning of section 13 of the Federal Reserve Act
and acceptance of member bank under such conditions would be eligible for rediscount.
(Informal Ruling, Page 636, July, 1918, Bulletin.)

It is the understanding of this office that sugar
referred to is placed in bond under transit entry
and warehouse receipt issued by collector in negotiable form, but sugar can not be withdrawn for
domestic sale or consumption without special perBoard is of
mission of Treasury Department.
opinion that member banks may legally accept

Bank Acceptances
drafts drawn against security of such
ceipt properly assigned.

41

warehouse

re-

(Informal Ruling, Page 520, June, 1918, Bulletin.)
Ineligible Security.

Drafts or bills of exchange drawn in domestic
transactions against a national bank cannot, under
authority of section 13, be accepted when secured
by a chattel mortgage on cattle but only when accompanied by shipping documents or when secured
by a warehouse receipt or other similar document
conveying or securing title to readily marketable

Chattel

mort * a * e8 -

staples.

While

cattle

may be treated as readily marketable

staples, a chattel

mortgage

is

not considered a docu-

ment

similar to a warehouse receipt since the borrower retains the possession of the goods and conveys to the bank only the legal title.
(Informal Ruling, Page 309, April, 1918, Bulletin.)

A

national bank is not authorized to accept a
draft secured by collateral notes which are in turn
secured by chattel mortgages on cattle.
(Informal Ruling, Page 690, September, 1917, Bulletin.)

Collateral
ote
j)

r*d

8e

4 a te
t

i

mortgage*.

Member banks are not authorized to accept drafts
of a cattle-loan company secured by notes of the
owner of the cattle, although such notes may be secured by a chattel mortgage executed by the owner
of the cattle to the cattle-loan company and the
notes and chattel mortgage accompany the draft at
the time of acceptance.
(Opinion of Counsel, Page 871, September, 1918, Bulletin.)

A

bill of sale is not a receipt similar to a warehouse or terminal receipt it is merely in substance
a chattel mortgage to goods in the hands of the
drawer and not a receipt for goods sold in the hands
of some third party "independent of the borrower."
;

(Opinion of Counsel, Page 684, December, 1916, Bulletin.)

Bills

of sale,

Commercial Banking Practice
The acceptance of a draft by a member bank
against an acceptance agreement which purports to
assign to the bank certain collateral security, but
which does not specifically mention any security as
assigned, is an ordinary accommodation acceptance,
and is not authorized by law.
(Opinion of Counsel, Page 311, April, 1918, Bulletin.)
Substitution of
Substitution.

Warehouse Receipts.

It is held that there is no objection to permitting
mills to substitute other warehouse receipts for cotton receipts during the life of an acceptance.
(Informal Ruling, Page 30, January, 1917, Bulletin.)

For a ruling governing the release of warehouse receipts
page 35, above.

after acceptance, see

MATURITY
"Bank Acceptances Based on DomesShipments of Goods," pages 35-36, above.

See, under
tic

AMOUNT BANK MAY ACCEPT FOR
ONE INTEREST
See, under "Bank Acceptances Based on Imports and Exports," pages 23-25, above.

AGGREGATE AMOUNT BANK

MAY ACCEPT
See, under
tic

"Bank Acceptances Based on Domes-

Shipments of Goods," pages 36-37, above.

43

Investment in Acceptances by

Member Banks
Statutory Provisions

"The total liabilities to any association, of any Ten per cent limit
person, or of any company, corporation, or firm for one^terlst^o^ 7
money borrowed, including in the liabilities of a national bank,
company or firm the liabilities of the several members thereof, shall at no time exceed ten per centum
of the amount of the capital stock of such association, actually paid in and unimpaired, and ten per
centum of its unimpaired surplus fund: Provided,
however, that (1) the discount of bills of exchange Exception of
drawn in good f aith against actually existing val- djscount of bill »
ues, (2) the discount of commercial or business Lsfnew* paper?
paper actually owned by the person, company, corporation, or firm, negotiating the same, and (3) the
purchase or discount of any note or notes secured Paper secured
State,
n
by not less than a like face amount of bonds of the obliga oen..
United States issued since April 24, 1917, or certificates of indebtedness of the United States, shall
not be considered as money borrowed within the
meaning of this section; but the total liabilities to
any association, of any person, or of any company,
corporation, or firm, upon any note or notes purchased or discounted by such association and secured
by such bonds or certificates of indebtedness, shall
not exceed (except to the extent permitted by rules
and regulations prescribed by the Comptroller of
the Currency, with the approval of the Secretary of
the Treasury) ten per centum of such capital stock
and surplus fund of such association."
l

ti

(U. S. Revised Statutes, Section 5200, as amended September 24, 1918.)

Commercial Banking Practice

44

Opinions and Rulings
Purchase or Discount of Acceptances
"Bills of

exchange" include
bank acceptances.

Bills discounted
before acceptance.

Other Banks.

"Bills of exchange" may be taken as including
acceptances, since a bill does not lose its characteristics as such when accepted by the drawee.
(Opinion of Counsel, Page 195, March, 1917, Bulletin.)

A bill of exchange discounted before acceptance
may

be said to be drawn against actually existing
only when it is accompanied by
value
shipping documents, warehouse receipts, or other
papers securing title to the goods sold.
(Opinion of Counsel, Page 195, March, 1917, Bulletin.)
.

Secured by shipping
documents or
pledge of goods.

of

.

.

A

bill secured by shipping documents, or by the
pledge of goods actually sold, might be discounted
by a member bank before acceptance without being

subject to the limitations imposed by section 5200,
since this would constitute a bill drawn in good
faith against actually existing value.
(Opinion of Counsel, Page 683, December, 1916, Bulletin.)
Bills

after

discounted
acceptance.

If the bill is discounted after acceptance it may
be treated as drawn against existing values if drawn
against the drawee at the time of, or within a reasonable time after, the shipment or delivery of the
goods sold. There must be reasonable grounds to
believe at the time the bill is drawn that the goods
are in existence in the hands of the drawee either
in their original form or in the shape of the proceeds

of their sale.
(Opinion of Counsel, Page 195, March, 1917, Bulletin.)
Acceptance
discounted after

removal of
attached
documents.

When

has been accepted by the drawee
and the documents attached have been removed,
though the direct obligation of the drawee to pay
such bill at maturity may be said to be substituted
for the "actual value" against which the bill was

such

bill

Bank Acceptances

45

originally drawn, nevertheless, when discounted by
a bona fide owner for value, its discount would not
be subject to the limitations of section 5200, since
it would still come within the classification of "commercial or business paper actually owned by the
person negotiating the same."
Should the drawee who accepts the bill, however,
attempt to discount it with a member bank it would
be subject to the limitations of section 5200, since
in that case the party primarily liable would in effect

borrow money from the bank on

his

own

ob-

ligation.
(Opinion of Counsel, Page 683, December, 1916, Bulletin.)

The Board finds it necessary to adhere to its established policy of not making any general ruling
on the question of how much a bank may invest in
any particular security. It held, however, that if
a firm is a bona fide owner for value of the acceptances of any particular institution and such acceptances are sold to or discounted with a member bank,
the acceptances could no doubt be treated as commercial or business paper actually owned by the

Discoan * <> f
-cceptances
c"
J usiness paper.

party negotiating them and would therefore be excepted from the limitations of section 5200, Re-

Ruling rests upon the fact that
commercial or business paper actually
owned by the person negotiating it.

vised Statutes.

paper

is

(Informal Ruling, Page 678, December, 1916, Bulletin.)

Purchase by National Bank

A

of Its

Own

Acceptances.

member bank may legally purchase its own ac- Bank ma y
purchase its
ceptances, but such a transaction is equivalent to a own acceptances.
loan or advance to the customer for whom the acceptance was made and the liability of such customer becomes subject to the limitations of section
5200, Revised Statutes.
(Opinion of Counsel, Page 680, December, 1916, Bulletin.)

Commercial Banking Practice

46
Exemption from
limitations of

Section 13.

When a bank purchases its own acceptance before maturity such acceptance need not be included
in the aggregate of acceptances authorized by section 13.
(Opinion of Counsel, Page 397, August, 1916, Bulletin.)
While the Board has ruled that when a bank buys

Reissuance of
acceptances.

own acceptances they are to be recorded as loans
subject to the limitations of section 5200, the right
of the bank to resell or reissue the acceptance is, in
the opinion of counsel, fully recognized by the authorities, and where this is done they may be treated
as acceptances outstanding and not as loans.
its

(Informal Ruling, Page 691, September, 1917, Bulletin.)
Rediscount of
snch acceptances.

An acceptance which has been purchased by the
accepting bank and subsequently rediscounted with
its Federal Reserve Bank is not subject to the limitations of section

5200 of the Revised Statutes.

(Opinion of Counsel, Page 696, September, 1917, Bulletin.)

PART

II.

Rediscounts
with

Federal Reserve

Banks

49

PART

II.

Rediscounts with Federal

Reserve Banks
General Statutory Provisions
Member banks of the Federal Reserve System
are authorized to rediscount notes, drafts, bills of
exchange, and bank acceptances with Federal reserve banks under the following provisions of the
Federal Reserve Act:
"Upon the indorsement of any of its member
banks, which shall be deemed a waiver of demand,
notice, and protest by such bank as to its own indorsement exclusively, any Federal reserve bank
may discount notes, drafts, and bills of exchange
arising out of actual commercial transactions that
is, notes, drafts, and bills of exchange issued or
drawn for agricultural, industrial, or commercial
purposes, or the proceeds of which have been used,
or are to be used, for such purposes, the Federal
Reserve Board to have the right to determine or
define the character of the paper thus eligible for
discount, within the meaning of this Act. Nothing
in this Act contained shall be construed to prohibit
such notes, drafts, and bills of exchange, secured by
;

staple agricultural products, or other goods, wares,
or merchandise, from being eligible for such discount; but such definition shall not include notes,

Notes, drafts, and
biIls of

exchan * e -

Commercial paper,

Agricultural

commodh '

and

P a P er -

Commercial Banking Practice

50
Ineligible paper.

Maturity of
eligible paper.

merely investments or issued or drawn for the purpose of carrying or trading in stocks, bonds, or other investment securities,
except bonds and notes of the Government of the
United States. Notes, drafts, and bills admitted
to discount under the terms of this paragraph must
have a maturity at the time of discount of not more
than ninety days, exclusive of days of grace Prodrafts, or bills covering

c

vided, that notes, drafts, and bills drawn or issued
for agricultural purposes or based on live stock

and having a maturity not exceeding

Amount rediscountby one bank
bearing signature
of any one interest.
able

Bank acceptances
eligible

for

rediscount

six

months,

exclusive of days of grace, may be discounted in an
amount to be limited to a percentage of the assets
of the Federal reserve bank, to be ascertained and
fixed by the Federal Reserve Board.
"The aggregate of such notes, drafts, and bills
bearing the signature or indorsement of any one
borrower, whether a person, company, firm, or corporation, rediscounted for any one bank, shall at no
time exceed ten per centum of the unimpaired capital and surplus of said bank; but this restriction
shall not apply to the discount of bills of exchange
drawn in good faith against actually existing
values.
"Any Federal reserve bank may discount acceptances of the kinds hereinafter described, which
have a maturity at the time of discount of not more
than three months' sight, exclusive of days of grace,
and which are indorsed by at least one member

bank."*
(Federal Reserve Act, Section 13.)
Rediscounts

member

for

State banks.

"No Federal reserve bank shall be permitted to
discount for any [member] State bank or trust
company notes, drafts, or bills of exchange of any
* For kinds of acceptances eligible for rediscount under this
see Part I, "General Statutory Provisions," pages

section,

11-12, above.

Rediscounts

51

one borrower who is liable for borrowed money to
such State bank or trust company in an amount
greater than ten per centum of the capital and surplus of such State bank or trust company, but the
discount of bills of exchange drawn against actually existing value and the discount of commercial or business paper actually owned by the person
negotiating the same shall not be considered as borrowed money within the meaning of this section.
The Federal reserve bank, as a condition of the
discount of notes, drafts, and bills of exchange for
such State bank or trust company, shall require a
certificate or guaranty to the effect that the borrower is not liable to such bank in excess of the

amount provided by this section, and
permitted to become liable in excess of

Conditions,

will not be
this

amount

while such notes, drafts, or bills of exchange are
under discount with the Federal reserve bank."
(Federal Reserve Act, Section 9.)

"No member bank

shall act as the

medium

or

agent of a nonmember bank in applying for or
receiving discounts from a Federal reserve bank
under the provisions of this Act, except by permission of the Federal Reserve Board."

^^S£S!T

(Federal Reserve Act, Section 19.)

purchase
"The discount and rediscount and the_ r
1
and sale by any Federal reserve bank ol any bills
...,

Sub ec 1 to regulations
i
of Federal Reserve
.

Board,

and of domestic and foreign bills of exchange, and of acceptances authorized by this Act,
shall be subject to such restrictions, limitations, and
regulations as may be imposed by the Federal
Reserve Board."
receivable

(Federal Reserve Act, Section IS.)

"The Federal

reserve banks shall be authorized,
subject to the maturity limitations of the Federal
Reserve Act and to regulations of the Federal
Reserve Board, to discount the direct obligations

Security

bonds.

^^.^

Commercial Banking Practice

52

of

member banks

secured by

.

.

.

bonds of the

eliFinance] Corporation and
indorsed by
gible paper secured by such bonds and
a member bank."
(War Finance Corporation Act, Section 13.)

[War

to rediscount

58

General Regulations of Federal
Reserve Board

SUMMARY OF STATUTORY
PROVISIONS
Any
of

may discount for any
note, draft, or bill of ex-

Federal reserve bank

member banks any

its

change provided
(a) It has a maturity at the time of discount of
lot more than 90 days, exclusive of days of grace;
out if drawn or issued for agricultural purposes or
based on live stock, it may have a maturity at the
time of discount of not more than six months, exclusive of days of grace
(b) It arose out of actual commercial transactions that is, it must be a note, draft, or bill of exchange which has been issued or drawn for agricultural, industrial, or commercial purposes, or the
proceeds of which have been used or are to be used
for such purposes;
(c) It was not issued for carrying or trading in
stocks, bonds, or other investment securities, except bonds and notes of the Government of the

Maturity,

Commercial

;

United States;
(d) The aggregate of notes,

drafts,

and

Finance paper
ineigI

bills Ten per

bearing the signature or indorsement of any one
borrower, whether a person, company, firm, or corporation, rediscounted for any one member bank,
shall at no time exceed ten per cent of the unimpaired capital and surplus of such bank; but this
restriction shall not apply to the discount of bills of

e*

cent limit,

Commercial Banking Practice

54

exchange drawn in good faith against actually existing values
Indorsement.

It is indorsed by a member bank;
It conforms to all applicable provisions of
this regulation.
(e)
(f)

(Regulations

of

Federal Reserve Board,

Regulation A,

Series of 1917, A, I.)

ELIGIBILITY OF NOTES, DRAFTS,
AND BILLS OF EXCHANGE

Commercial paper.

Finance paper
ineligible.

Collateral
security.

The Federal Reserve Board, exercising its statutory right to define the character of a note, draft, or
bill of exchange eligible for rediscount at a Federal
reserve bank, has determined that
(a) It must be a note, draft, or bill of exchange
the proceeds of which have been used or are to be
used in producing, purchasing, carrying, or marketing goods* in one or more of the steps of the process of production, manufacture, or distribution;
(b) It must not be a note, draft, or bill of exchange the proceeds of which have been used or are
to be used for permanent or fixed investments of
any kind, such as land, buildings, or machinery;
(c) It must not be a note, draft, or bill of exchange the proceeds of which have been used or are
to be used for investments of a purely speculative
character
(d) It may be secured by the pledge of goods or
collateral, provided it is otherwise eligible.
(Regulations of Federal
Series of 1917, A, II.)

Reserve

Board,

Regulation

A,

*When used in this regulation the word "goods" shall be
construed to include goods, wares, merchandise, or agricultural
products, including live stock.

Rediscounts

55

APPLICATIONS FOR REDISCOUNT
All applications for the rediscount of notes,
exchange must contain a certificate of the member bank, in form to be prescribed
by the Federal reserve bank, that, to the best of its
knowledge and belief, such notes, drafts, or bills of
exchange have been issued for one or more of the
purposes mentioned in (a) above.
drafts, or bills of

,

(Regulations of Federal
Series of 1917, A, III.)

Reserve

Board,

Regulation

A,

Certificate of

member back.

Rediscount of Promissory
Notes
DEFINITION OF NOTE

A

promissory note, within the meaning of this
regulation, is defined as an unconditional promise,
in writing, signed by the maker, to pay, in the
United States, at a fixed or determinable future
time, a sum certain in dollars to order or to bearer.
(Regulations

Federal

of

Reserve

Board,

Regulation A,

Series of 1917, A, IV.)

ELIGIBLE CLASSES OF NOTES
Statutory Provisions
Commercial paper.

Agricultural and
commodity paper.

Paper based on
United States
obligations.

Eligible notes are defined in the laws as follows:
"Notes, drafts, and bills of exchange issued or
drawn for agricultural, industrial, or commercial
purposes, or the proceeds of which have been used,
or are to be used, for such purposes, the Federal
Reserve Board to have the right to determine or
define the character of the paper thus eligible for
discount, within the meaning of this Act. Nothing
in this Act contained shall be construed to prohibit
such notes, drafts, and bills of exchange, secured
by staple agricultural products, or other goods,
wares, or merchandise, from being eligible for such
notes, drafts, or bills
discount; [or]
drawn for the purpose of carrying or
issued or
.

.

.

.

.

.

Rediscounts
trading in

ment

.

.

.

57

bonds and notes of the Govern-

of the United States."

(Federal Reserve Act, Section 13.)

"The Federal

reserve banks shall be authorized,
subject to the maturity limitations of the Federal
Reserve Act and to regulations of the Federal
Reserve Board, to discount the direct obligations
bonds of the
of member banks secured by
[War Finance] Corporation and to rediscount eli.

.

Paper based on bonds

War Finance
Corporation.

of

.

paper secured by such bonds and endorsed by
a member bank."

gible

(War Finance Corporation

Act, Section 13.)

Regulations of Federal Reserve Roard

The Federal Reserve Board, exercising its statutory right to define the character of a note, draft, or
bill of exchange eligible for rediscount at a Federal reserve bank, has determined that
It must be a note, draft, or bill of exchange, the
proceeds of which have been used or are to be used
in producing, purchasing, carrying, or marketing
goods* in one or more of the steps of the process of
production, manufacture, or distribution
The paper may be secured by the pledge of goods
or collateral provided it is otherwise eligible.
(Regulations of Federal
Series of 1917, A, II.)

Reserve

Board,

Regulation

Commercial paper,

Collateral notes,

A,

Opinions and Rulings
Federal reserve banks do not make loans dipaper of

rectly to individuals, but rediscount the

* When used in this regulation the word "goods" shall be
construed to include goods, wares, merchandise, or agricultural products, including live stock.

Loans to individnaU.

Commercial Banking Practice

58

member

banks, which include all national banks and
such State banks as may have joined the Federal
Reserve System.
(Informal Ruling, Page 272, June, 1916, Bulletin.)

Notes Based on Production and Distribution
Paper of waterworks
company.

of

Goods.

The 90-day paper of a waterworks company, the
proceeds of which have been or are to be used to
provide funds for payroll, purchases of coal, etc.,
is eligible for rediscount by a Federal reserve bank
if tbe paper is otherwise in conformity with the law
and the provisions of the Board's regulations.
(Informal Ruling, Page 527, July, 1917, Bulletin.)

Farmers' notes.

Farmers' notes, the proceeds of which are used
for tilling farms or for draining land already in
use as farm land, should be classified as agricultural
paper, and are eligible for rediscount.
(Informal Ruling, Page 743, August, 1918, Bulletin.)

Assignment of open
accounts ineligible.

The assignment

of an open account is not negopaper and is not eligible for rediscount by a
Federal reserve bank under the terms of section
18 of the Federal Reserve Act.
tiable

(Opinion of Counsel, Page 227, May, 1916, Bulletin.)
Discount of renewal
notes.

Renewals

differ,

and banking judgment deter-

Selfmines the merits of each particular case.
liquidating paper, even though the transaction
which gives rise to it does not liquidate itself within
the 90-day maturity, might be discounted even
though it appears to be renewal paper. Banks
should not enter into an agreement for a renewal.
Care should be exercised in examining such paper
and the transactions which give rise to it, but mechanical rules should not be allowed to take the
place of discriminating banking judgment.
(Informal Ruling, Page 74, June, 1915, Bulletin.)

Rediscounts

59

Secured Notes.

Under

section 13 of the Federal Reserve Act the
eligibility of a note for rediscount is determined by
the use of the funds derived from the original negotiation of the note.
The collateral security of the

tested

Eligibility

nse of funds.

note may indicate its use, but the form of collateral
is otherwise immaterial.
In other words, a note
might be secured by railroad stocks and bonds, but
the proceeds might be used for an agricultural,
industrial, or a commercial purpose, in which event
the note would be eligible for rediscount, although
it would not be if the proceeds were used to purchase or carry the railroad stocks and bonds.
(Opinion of Counsel, Page 954, December, 1917, Bulletin.)

Notes secured by collateral, the proceeds of
which have been used or are to be used for commercial purposes, and which otherwise comply with the

Collateral notes for

commercial purposes.

regulations, are eligible for rediscount.
The fact that commercial paper has the additional security of collateral in no way affects its
eligibility for rediscount.
(Informal Ruling, Page 268, September, 1915, Bulletin.)

A note, even though secured by eligible paper,

is

Eligible

security not

sufficient.

itself eligible for rediscount unless issued for an
agricultural, commercial, or industrial purpose.
(Informal Ruling, Page 690, September, 1917, Bulletin.)

not

of a manufacturer secured by his bills
receivable is desirable paper, and should certainly
not be debarred as a collateral trust note.
(Informal Ruling, Page 127, July, 1915, Bulletin.)

The note

A note, draft, or bill of exchange drawn for commercial purposes and otherwise eligible for rediscount under the provisions of section 13 of the
Federal Reserve Act is not rendered ineligible
merely because it is secured by a mortgage on real
estate.
(Opinion of Counsel, Page 458, June, 1917, Bulletin.)

Collateral

of

receivable.

Collateral of

mortgages.

bills

Commercial Banking Practice

so
Rediscount for
insolvent

bank

when reopened.

Notes secured by
food products.

The Board upholds a Federal reserve bank in
declining to give assurance to the receiver of an
insolvent member bank that the Federal reserve
bank will upon the reopening of the insolvent bank
rediscount eligible paper freely, without requiring
the indorsement of directors or other additional security. Offerings should be considered upon their
merits.
(Informal Ruling, Page 66, February, 1916, Bulletin.)
Paper secured by staple perishable food products
such as butter, cheese, eggs, poultry, frozen fish,
etc., carried for seasonable periods in cold storage
on negotiable warehouse receipts, is eligible, if offered with the indorsement of a member bank at
the usual rate for 90-day commercial paper.
(Informal Ruling, Page 30, January, 1918, Bulletin.)

Pig iron security.

The note of a furnace company secured by pig
iron manufactured by the company on contract for
delivery is eligible for rediscount. While this prineach case should be
carefully scrutinized that the collateral may be
readily marketable goods.
ciple generally holds good,

(Informal Ruling, Page 127, July, 1915, Bulletin.)

Notes Based on United States Obligations and
Finance Corporation Bonds.
Authority.

War

The statement

of law that the definition of elipaper shall not include notes, drafts, or bills
of exchange drawn for the purpose of "carrying or
gible

trading in stocks, bonds, or other investment seexcept bonds and notes of the Government
of the United States," is equivalent to an affirmative declaration that a Federal reserve bank may
discount a note, draft, or bill of exchange indorsed
by a member bank which is issued or drawn for the
purpose of carrying or trading in bonds or notes of

curities,

the United States.
(Informal Ruling, Page 158, March, 1917,

Bulletin.)

Rediscounts

61

Any member bank

which has loaned money to
customers for the purpose of carrying or
trading in bonds or notes of the United States may
rediscount with its Federal reserve bank the bill
or note of its customer, provided such bill or note
(a) Has a maturity at the time of discount of
™
^"^j. ty
e gl
not more than ninety days, exclusive of days

any of

its

'

'

of

'

*

of grace; and
Has the indorsement of the member bank.
Such bill or note, however, need not necessarily
(b)

'

be secured and need not be drawn for a commercial
purpose other than for the purpose of carrying or
trading in notes or bonds of the United States.
(Informal Ruling, Page 158, March, 1917, Bulletin.)

A

member bank acting through another member
bank may obtain the discount of its paper secured
by Government bonds for a period as long as 90
days, although a member bank acting alone may

Maturity in relation
t0

eligibility -

not tender its collateral note to the Federal reserve
bank, which runs for more than 15 days.
It may be proper in this connection to consider
questions of fact but in case a country bank which
has regular dealings with a large bank in a city
sends its note secured by Government bonds to that
bank, the Board would regard the note as eligible
for rediscount by the city bank.
(Informal Ruling, Page 863, September, 1918, Bulletin.)
;

If the proceeds of a note have been used or are to
be used to carry or trade in United States obligations, the note, if acquired in good faith, should be
eligible for rediscount with the indorsement of the
member bank, whether it is executed by a member
or by a nonmember bank.
(Informal Ruling, Page 743, August, 1918, Bulletin.)

Notes of nonmember

banks *

Commercial Banking Practice

62

INELIGIBLE GLASSES OF NOTES
Statutory ^Provisions
Security paper.

"Such

definition

[of paper eligible for redis-

count] shall not include notes, drafts, or bills covering merely investments or issued or drawn for the
purpose of carrying or trading in stocks, bonds, or
other investment securities, except bonds and notes
of the United States."
(Federal Reserve Act, Section IS.)

Regulations of thc^Eederal Reserve Hoard
Notes for permanent,
fixed, or speculative

investments.

The paper must not be a note, draft, or bill of
exchange, the proceeds of which have been used or
are to be used for permanent or fixed investments
of any kind, such as land, buildings, or machinery.
The paper must not be a note, draft, or bill of
exchange, the proceeds of which have been used or
are to be used for investments of a purely speculative character.
(Regulations

of

Federal

Reserve

Board,

Regulation

A,

Series of 1917, A, II.)

Opinions and Rulings
Renewals and Extensions.
Discount of renewal
notes.

Renewals differ, and banking judgment determines the merits of each particular case. Those
providing working capital or to finance fixed investments are not eligible for rediscount. Banks
should not enter into an agreement for a renewal.
(Informal Ruling, Page 74, June, 1915, Bulletin.)

Extension.

A

note or draft containing a provision for an
extension of time should not be approved for general use by the Federal Reserve Board.
(Opinion of Counsel, Page 870, September, 1918, Bulletin.)

Rediscounts

63

Financial Paper.

A note

executed by Bank "A," and discounted
by Bank "B," the proceeds of which were used to
replace funds withdrawn by customers to purchase
Liberty Bonds, is not eligible for rediscount by a
Federal reserve bank, since the proceeds were not
used for an agricultural, industrial, or commercial
purpose, or for the purchase of notes or bonds of

Notes

Replace

the United States.
(Opinion of Counsel, Page 954, December, 1917, Bulletin.)

"Notes, drafts, and bills of exchange which are
secured by war savings stamps are ineligible for
rediscount with a Federal reserve bank.'
Counsel suggests that war savings stamps are
not bonds or notes of the United States but in effect only receipts for payment on account of nonnegotiable evidences of indebtedness (war savings

Paper secured hj

war savings ,tamp8

'

,

certificates)

(Opinion of Counsel, Page 637, July, 1918, Bulletin.)

The note

of an acceptance house or broker, secured by acceptances eligible for rediscount at a
Federal reserve bank, is not eligible for redis-

Notes of acceptance
house or broker.

count.

The note

of the acceptance house or broker can
not be said to have been used for an industrial, agricultural, or commercial purpose, since the business
of such acceptance house or broker is not such as to

come within any of these classifications. The fact
that the note is secured by eligible paper is immaterial if the proceeds are not used for one of the
purposes named.
(Informal Ruling, Page 108, February, 1918, Bulletin.)

The note of a finance or credit company which is
drawn either directly or indirectly to finance some
industrial or commercial concern in the transaction
of its business is not eligible for rediscount, even

Notes

finance
°f

Commercial Banking Practice

64

though

it

may

be secured by paper which

is itself

eligible for rediscount.
(Informal Ruling, Page 197, March, 1918, Bulletin.)
Collateral
trust notes.

The Board holds that collateral trust notes of socalled finance companies should not be accepted by
Such a
Federal reserve banks for rediscount.
transaction is not a commercial one.
(Informal Ruling, Page 72, June, 1915, Bulletin.)

Collateral of bills

receivable.

of a manufacturer secured by his bills
desirable paper, and should certainly
not be debarred as a collateral trust note. When
issued for the purpose of carrying collateral for a
speculative purpose or collateral in the nature of
stocks and bonds other than the securities of the
United States, the note would not be eligible for

The note

receivable

is

rediscount.
(Informal Ruling, Page 127, July, 1915, Bulletin.)
Bills Payable with Collection Charges.
Exchange and
collection charges

distinguished.

"A

bill made payable with 'collection charges'
not a negotiable instrument, though the Negotiable Instruments Law provides that an instrument payable 'with exchange' does not lose its neis

gotiability."

Counsel suggests that the amount of exchange is
usually ascertainable in advance while collection
charges are not so ascertainable.
(Opinion of Counsel, Page 880, November, 1917, Bulletin.)
Charges before and
after maturity.

"While a bill containing a provision for payment
of the costs of collection and attorney's fees, if it is
dishonored at maturity, is a valid negotiable instrument, a bill drawn for a fixed sum 'with collection
charges' is not a negotiable instrument unless it is
so drawn as to show that no collection charges are
to be included unless the bill

is

dishonored at ma-

turity."
(Opinion of Counsel, Page 745, August, 1918, Bulletin.)

Rediscounts

65

EVIDENCE OF ELIGIBILITY AND REQUIREMENT OF STATEMENTS
Regulations of the Federal Reserve Board

A Federal reserve bank must be satisfied by reference to the note or otherwise that it is eligible for
rediscount.
Compliance of a note [with the re-

E

i

T

^

e Igl

e of

,ty *

*

quirements of eligibility]
may be evidenced
by a statement of the borrower showing a reasonable excess of quick assets over current liabilities.
.

The member bank

.

.

shall certify in its application

whether the note offered for rediscount has been
discounted for a depositor or another member bank
or whether it has been purchased from a nondepositor.
It must also certify whether a financial
statement of the borrower is on file.
Such financial statements must be on file with
respect to all notes offered for rediscount which
have been purchased from sources other than a depositor or a member bank. With respect to any
other note offered for rediscount, if no statement is
on file, a Federal reserve bank shall use its discretion in taking the steps necessary to satisfy itself
as to eligibility. It is authorized to waive the requirement of a statement with respect to any note
discounted by a member bank for a depositor or
another member bank
:

If it is secured by a warehouse, terminal, or
( 1 )
other similar receipt covering goods in storage;
(2) If the aggregate of obligations of the borrower rediscounted and offered for rediscount at
the Federal reserve bank is less than a sum equal to
10 per cent of the paid-in capital of the member
bank and does not exceed $5,000.
(Regulations

of

Federal

Series of 1917, A, IV.)

Reserve Board,

Regulation

A,

Financial statements,

Waiver of statement,

66

Commercial Banking Practice
Opinions and Rulings

Cotton-mill paper.

Banks are authorized to discount cotton-mill
paper indorsed by member banks where general
conditions are satisfactory and statement of cotton mill shows that plant is not mortgaged and that
the deficiency between capital and plant account
does not amount to more than $5 per spindle.
(Informal Ruling, Page 73, June, 1915, Bulletin.)

Standing timber.

The Board does not regard it as safe policy for
Federal reserve banks to treat timber standing
upon tracts of land as quick assets, similar to manufactured goods in the hands of the manufacturer or
jobber.
(Informal Ruling, Page 126, July, 1915, Bulletin.)

Unmined mineral..

Unmined

minerals are not regarded as quick

assets.

(Informal Ruling, Page 126, July, 1915, Bulletin.)

MATURITY OF NOTES ELIGIBLE
FOR REDISCOUNT
Statutory Provisions
Commercial paper.

Agricultural or live
stock paper.

"Notes, drafts, and bills admitted to discount under terms of this paragraph must have a maturity
at the time of discount of not more than ninety
days, exclusive of days of grace: Provided, that

and bills drawn or issued for agricultural purposes or based on live stock and having a
maturity not exceeding six months, exclusive of
days of grace, may be discounted in an amount to

notes, drafts,

be limited to a percentage of the assets of the Federal reserve bank, to be ascertained and fixed by
the Federal Reserve Board."
(Federal Reserve Act, Section 13.)

Rediscounts

67

Regulations^of Federal]Reserve Board

Any

Federal reserve bank may discount for any
of its member banks any note, draft, or bill of exchange provided it has a maturity at the time of
discount of not more than ninety days, exclusive of
days of grace; but if drawn or issued for agricultural purposes or based on live stock, it may have
a maturity at the time of discount of not more than
six months, exclusive of days of grace.
(Regulations of Federal
Series of 1917, A, I.)

Reserve

Board,

Regulation

Maturity of 90 days,

Maturity of six
months.

A,

Opinions and Rulings

A

payable "on or before" a certain date is
negotiable paper and, if otherwise in conformity
with the provisions of law and of the Federal Heserve Act, is eligible for discount by a Federal reserve bank.
bill

Notes payable
"on or before."

(Informal Ruling, Page 394, August, 1916, Bulletin.)

A

not eligible under the
provisions of the Act, since it is not in terms payable within the prescribed ninety days, but may, at
the option of the holder, not be presented for pay-

demand note

ment

or

bill is

Demand

note «-

until after that time.

If the bill were altered so as to read "on or bedays from date, pay to the order of
fore
ourselves," etc., it would come within the terms of
the law and would be eligible for rediscount.
(Informal Ruling, Page 378, May, 1917, Bulletin.)
*

A note made payable "on demand, and

mand

if

no de-

," is eligible for
made, then on
by a Federal reserve bank, provided
rediscount
is

that the date to be filled in is not more than 90 days
from the date of discount, and provided further it
conforms to the other provisions of law and the
regulations of the Board.
(Informal Ruling, Page 527, July, 1917, Bulletin.)

Notes payable before
certain

date.

Commercial Banking Practice

68
Extension of time.

Direct loans and
rediscounts
distinguished.

A

note or draft containing a provision for an extension of time should not be approved for general
use by the Federal Reserve Board.
(Opinion of Counsel, Page 870, September, 1918, Bulletin.)

A

member bank acting through another member
bank may obtain the discount of its paper secured
by Government bonds for a period as long as 90
days, although a member bank acting alone may
not tender its collateral note to the Federal reserve bank, which runs for more than 15 days.
It may be proper in this connection to consider

—

questions of fact whether the transaction is in
good faith or whether the two banks exchange
courtesies merely for the purpose of having their
notes discounted for 90 days instead of 15 days;
but in case a country bank which has regular dealings with a large bank in a city sends its note secured by Government bonds to that bank, the
Board would regard the note as eligible for redis-

count by the city bank.
(Informal Ruling, Page 863, September, 1918, Bulletin.)

AMOUNT OF PAPER OF
ONE INTEREST REDISCOUNTABLE
FOR ONE MEMBER BANK
Statutory Provisions
Ten per cent

Exception.

limit.

"The aggregate of such notes, drafts, and bills
bearing the signature or indorsement of any one
borrower, whether a person, company, firm, or corporation, rediscounted for any one bank shall at no
time exceed ten per centum of the unimpaired capital and surplus of said bank; but this restriction
shall not apply to the discount of bills of exchange
drawn

in

good

faith

against

values."
(Federal Reserve Act, Section 13.)

actually

existing

Rediscounts

69

bank shall be permitted to
discount for any [member] State bank or trust
company notes, drafts, or bills of exchange of any
one borrower who is liable for borrowed money to
such State bank or trust company in an amount
greater than ten per centum of the capital and surplus of such State bank or trust company; but the
discount of bills of exchange drawn against actually
existing value and the discount of commercial or
business paper actually owned by the person negotiating the same shall not be considered as borrowed
money within the meaning of this section. The

R ediscou »ts

Federal reserve bank, as a condition of the discount
of notes, drafts, and bills of exchange for such State

Conditions,

"No Federal

reserve

J-

tor

member

state

banks,

bank or trust company, shall require a certificate or
guaranty to the effect that the borrower is not liable
to such bank in excess of the amount provided by
this section, and will not be permitted to become
liable in excess of this amount while such notes,
drafts, or bills of exchange are under discount with
the Federal reserve bank."
(Federal Reserve Act, Section 9.)

Regulations of Federal Reserve Board

"The aggregate

of notes, drafts, and bills bearing the signature or indorsement of any one borrower, whether a person, company, firm, or corporation, rediscounted for any one member bank,
shall at no time exceed ten per cent of the unimpaired capital and surplus of such bank; but this
restriction shall not apply to the discount of bills
of exchange drawn in good faith against actually
existing values."
(Regulations

of

Federal

Series of 1917, A, I.)

Reserve

Board,

Regulation

A,

Ten per cent

Exception,

limit,

Commercial Banking Practice

70

Opinions and Rulings
Ten per cent

Paper

of

limit.

one maker

or indorser.

Not applicable

Paper

of cotton

If any particular paper presented by a member
to a Federal reserve bank for rediscount,
singly or added to the paper of the same makers or
indorsers which the Federal reserve bank has already rediscounted for said member bank, amounts
to a total of more than ten per cent of the unimpaired capital and surplus of that bank, the Federal reserve bank has no authority for such rediscount.
(Informal Ruling, Page 224, May, 1916, Bulletin.)

bank

to

rediscounting bank.

broker.

A

Federal reserve bank is not permitted to rediscount the paper of a customer of a member State
bank if the customer is indebted to the member bank
in an amount in excess of ten per cent of the capital
and surplus of the member bank.
(Informal Ruling, Page 863, September, 1918, Bulletin.)

In the opinion of the Board the limitations contained in section 13 of the Federal Reserve Act on
the rediscount of paper bearing the signature or
indorsement of any one borrower should not be held
to refer to the indorsement of a nonmember bank
on paper rediscounted with a member bank.
(Informal Ruling, Page 520, June, 1918, Bulletin.)

A

cotton broker who is a depositor of a bank
finances cotton for various mills by giving to the

bank

his note secured by warehouse receipts of the
mills indorsed in blank, for cotton stored in his

name and properly

insured, but sold to the mill for
a specific amount to be paid at a specific time, as
per sales note attached.
The question arises
whether such loans taken from one broker in excess of ten per cent of the capital and surplus of
the bank would be an excess loan under the Federal
Reserve Act, if the financing for each individual

Rediscounts

71

and the accepted sales note held of said mill
were not in excess of said ten per cent.
It is held that the transaction in form is merely a
discount of single name negotiable paper secured
by so many bales of cotton. Such notes would
clearly come within the provisions of section 5200
of the Revised Statutes.*
The language of section 13 of the Federal Reserve Act is still more comprehensive and no Federal reserve bank could rediscount such notes bearing the name of one broker for an aggregate
amount in excess of ten per cent of the capital and
mill

surplus of the

member bank.

(Informal Ruling, Page 113, March, 1916, Bulletin.)

Relation of Section 5200, Revised Statutes,* to the Ten

Per Cent Limit.

While a member bank may acquire commercial
or business paper from the same person in excess
of ten per cent of its unimpaired capital and surplus, its Federal reserve bank can not rediscount

Commercial or
business paper.

such paper bearing the signature or indorsement of
the same person in excess of that amount.
Section 13, Federal Reserve Act, does not amend
section 5200, United States Revised Statutes.
(Opinion of Counsel, Page 274, June, 1916, Bulletin.)

A

rediscounted in good faith by a
is no longer owned or held by
the bank, need not be included as a liability of the
maker to the bank within the meaning of section
5200, Revised Statutes. Notes or bills rediscounted
under an agreement to repurchase, or which are
merely credited to the account of the bank offering
them for rediscount, are subject to the limitations
of section 5200.

note or

bill

member bank, which

(Opinion of Counsel, Page 867, September, 1918, Bulletin.)
* For section 5200 see page 43, above.

Rediscounted paper

7

"^ctioTs^oo.

72
Rediscount by State
member banks.

Commercial Banking Practice
Where a State bank, which is a member of the
Federal Reserve System, has loaned to one of its
customers an amount equal to 30 per cent of its
capital and surplus, and has rediscounted twothirds of this amount with a correspondent bank,
the remaining one-third is eligible for rediscount
with its Federal reserve bank.
(Opinion of Counsel, Page 638, July, 1918, Bulletin.)

AGGREGATE AMOUNT REDISCOUNTABLE FOR ONE BANK
Statutory Provisions
Not limited by
section 5202.

"No

national banking association shall at any

time be indebted, or in any way liable, to an amount
exceeding the amount of its capital stock at such
time actually paid in and remaining undiminished
by losses or otherwise, except on account of
liabilities incurred under the provisions of the Federal Reserve Act."
.

.

.

(Section 5202, Revised Statutes, as amended by Section 13,
Federal Reserve Act.)
Subject to regulations
of Federal Reserve

Board.

"The discount and rediscount and the purchase
and sale by any Federal reserve bank of any bills
and of domestic and foreign bills of exchange, and of acceptances authorized by this Act,
shall be subject to such restrictions, limitations, and
regulations as may be imposed by the Federal Rereceivable

serve Board."
(Federal Reserve Act, Section 13.)

Opinions and Rulings
Not limited by law.

amount of
bank may recommercial paper which a member

The law

places no limitation

upon

the

discount with a Federal reserve bank, but leaves

Rediscounts

73

this to the judgment of the officers of the Federal
reserve bank.
(Informal Ruling, Page 457, September, 1916, Bulletin.)

Under

section 5202, Revised Statutes, a national
as bills payable in excess of
Under the Federal Reserve Act
its capital stock.
it may rediscount actual items of paper in its possession to any amount in the discretion of the Fed-

bank may not borrow

Discretion of Federal

reserve

eral reserve bank of its district.
(Informal Ruling, Page 112, March, 1916, Bulletin.)

INDORSEMENT OF MEMBER BANKS
Statutory Provisions

"Upon

the indorsement of

any of

member

its

indorsement,

banks, which shall be deemed a waiver of demand,
and protest by such bank as to its own indorsement exclusively, any Federal reserve bank
may discount notes, drafts, and bills of exchange."
notice,

(Federal Reserve Act, Section 13.)

Opinions and Rulings

A

simple written indorsement will be regarded
and as coming within the terms of

indorsement
'

as satisfactory
the law.

(Informal Ruling, Page 524, October, 1916, Bulletin.)

If a note is otherwise eligible for rediscount, the
fact that it bears a "without recourse" indorsement
of a nonmember bank will not affect its eligibility.
(Opinion of Counsel, Page 745, August, 1918, Bulletin.)

Without recourse,

REDISCOUNT FOR NONMEMBER

BANKS

Statutory Provisions

"No member bank
n

agent of

ill*
a nonmember bank

shall act as the

in

i

•

medium
n

applying tor or

or

Procuring rediscounts
tor

re-

nonmembers.

Commercial Banking Practice

74

ceiving discounts from a Federal reserve bank under the provisions of this Act, except by permission
of the Federal Reserve Board."
(Federal Reserve Act, Section 19.)

Opinions and Rulings
Rediscount of paper
acquired from

Assuming that the paper offered by a member
bank f or rediscount is eligible under the regulations
prescribed by the Board, it would be necessary in
each case for the officers of the Federal reserve
bank to determine whether or not the proceeds of
such discount are to be used for the purpose of making a loan to a nonmember bank. If the money
thus borrowed is to be re-lent to a nonmember
bank, rediscount should not be accepted without
the permission of the Federal Reserve Board. If,
on the other hand, a member bank had in good
faith acquired from a nonmember bank by rediscount notes which are eligible under the regulations
of the Board for rediscount with the Federal reserve bank, and such notes were held as a part of
the assets of the member bank, there would seem to
be no objection to the Federal reserve bank's accepting such rediscounts, provided the officers are
satisfied that the transaction is a bona fide transaction and that the member bank did not extend
accommodation to the nonmember bank with a
view to rediscounting notes so acquired with the
Federal reserve bank.
This is one of the cases which must be left very
largely to the judgment and discretion of the Federal reserve bank officers; and a determination
must be reached by them on the facts of the case.
(Informal Ruling, Page 213, August, 1915, Bulletin.)

Rediscount of paper
d r

io

l ember

y

bank.

In the opinion of the Board the limitations contained in section 13 of the Federal Reserve Act on
the rediscount of paper bearing the signature or in-

Rediscounts

75

dorsement of any one borrower should not be held
to refer to the indorsement of a

nonmember bank

on paper rediscounted with a member bank.
It is true that in such case the nonmember bank
is contingently liable if the paper is not paid at maturity, but the Board is inclined to the view that
this language refers to paper bearing the signature
or indorsement of borrowers or customers of the
member bank and not to the indorsement of other

A

banks.
nonmember bank could not, of course,
obtain indirect accommodation from the Federal
reserve bank through the medium or agency of a
member bank except with the permission of the
Federal Reserve Board, but if a member bank had
acquired eligible paper in due course by rediscount
from a nonmember bank the member bank should
hardly be precluded from rediscounting this paper
with the Federal reserve bank because it bears the
indorsement of the nonmember bank.
(Informal Ruling, Page 520, June, 1918, Bulletin.)

76

Rediscount of Drafts and Trade
Acceptances
DEFINITION OF DRAFT
Regulations of Federal Reserve Board
Draft or bill
of exchange.

A

draft or bill of exchange, within the meaning
of this regulation, is defined as an unconditional
order in writing, addressed by one person to ansigned by the perother, other than a banker
giving it, requiring the person to whom it is
son
addressed to pay, in the United States, at a fixed or
determinable future time, a sum certain in dollars
.

.

.

to the order of a specified person.
(Regulations

of

Federal

Reserve

Board,

Regulation

A,

Series of 1917, A, V.)

Opinions and Rulings
Extension

A note or draft containing a provision for an ex-

of time.

tension of time should not be approved for general
use by the Federal Reserve Board.
(Opinion of Counsel, Page 870, September, 1918, Bulletin.)

Presentment

The drawer and indorser of a bill of exchange
made payable on a date specified in the bill are not

of bills for

acceptance.

discharged by a failure to present for acceptance,
unless the bill expressly provides that it must be
presented for that purpose, or unless it is payable
elsewhere than at the residence or place of business of the drawee.
(Opinion of Counsel, Page 608, November, 1916, Bulletin.)
Acceptor not
affected by

The acceptor of a bill of exchange is the prinThe law requires that notice of de-

cipal debtor.

mand and

protest be given to parties secondarily

Rediscounts

77

liable in case of dishonor.
This right to receive
notice is a personal one which may be waived by
the parties entitled thereto, that is, the drawer and
indorser; but such waiver has no effect on the ac-

ceptor or principal debtor.
(Opinion of Counsel, Page 277, September, 1915, Bulletin.)
Negotiability.

The negotiability of a bill of exchange is not affected by provisions which waive demand, notice,
and protest; which waive homestead exemption
rights and which provide for the costs of collection
and attorney's fees.
(Opinion of Counsel, Page 226, May, 1916, Bulletin.)

Effect of

waivers,

;

A

provision in a draft or bill of exchange that it
payable "with interest at the rate of
per cent
per annum after maturity, if payment is delayed,"
does not affect the negotiability of the instrument.

—

is

D r aft ?

payable

(Opinion of Counsel, Page 200, March, 1917, Bulletin.)

A draft made "payable on arrival of car"

nonnegotiable, not being payable at a determinable
is

Drafts payable
on cond,tlon -

future time.
(Opinion of Counsel, Page 219, August, 1915, Bulletin.)

"A bill made payable with collection charges' is
not a negotiable instrument, though the Negotiable
Instruments Law provides that an instrument payable 'with exchange' does not lose its negotiability."
Counsel suggests that the amount of exchange is
usually ascertainable in advance while collection
charges are not so ascertainable.
'

Exchange and
charges!

(Opinion of Counsel, Page 880, November, 1918, Bulletin.)

While a

bill

containing a provision for payment

of the costs of collection and attorney's fees,
dishonored at maturity, is a valid negotiable instrument, a bill drawn for a fixed sum "with collection
charges" is not a negotiable instrument unless it

if it is

b

^JJ7f

j*

r

^

e
rit

Commercial Banking Practice

78

is

so

drawn

as to

show that no

be included unless the
maturity.
to

collection charges are

bill

is

dishonored at

(Opinion of Counsel, Page 745, August, 1918, Bulletin.)
Drafts payable
to order of drawee.

A

bill made payable to the order of the drawee is
not negotiable until the drawee as payee has indorsed it. When it has been accepted and indorsed
by the drawee it is a valid negotiable instrument in
the hands of a third party, and the drawer is not
released, since the terms of his order have been
specifically complied with.

(Opinion of Counsel, Page 110, February, 1918, Bulletin.)

DEFINITION OF TRADE ACCEPTANCE
Regulations of Federal Reserve Board

A trade acceptance

Trade acceptance.

is

defined as a draft or

bill

of

exchange drawn by the seller on the purchaser of
goods sold, and accepted by such purchaser.
(Regulations

of

Federal

Reserve

Board,

Regulation

A,

Series of 1917, A, V.)

Opinions and Rulings
Acceptance
by drawee.

A draft to be eligible as a trade acceptance must
be accepted by the drawee and not by anyone

else.

(Informal Ruling, Page 112, March, 1916, Bulletin.)
Place of payment
cf acceptance.

An acceptance to pay at a particular place different from the residence of the acceptor is a general
acceptance, unless it expressly states that the bill is
to be paid there and not elsewhere, and does not
render the bill nonnegotiable.
(Opinion of Counsel, Page 289, April, 1917, Bulletin.)

A

Discount for

payment
maturity.

at

trade acceptance which consists of an order

pay a certain amount, which is the amount of the
debt minus a discount for prompt payment at ma-

to

Rediscounts
turity, or, if not paid at maturity, to

79

pay a greater

amount, which is the amount of the debt without
any discount, is an order to pay a sum certain and
is

negotiable.
(Opinion of Counsel, Page 200, March, 1918, Bulletin.)

A

trade acceptance providing for a fixed discount, if paid at a certain time before maturity,
should not be approved for general use by the Fed-

Discount for
prepayment.

eral Reserve Board.
(Opinion of Counsel, Page 871, September, 1918, Bulletin.)

On the basis

of the facts submitted in this case, it
is held that a 90-day sight draft drawn by a firm in
Calcutta on a company in Boston and accepted by
that firm, covering a transaction involving the
transportation of merchandise from Calcutta to
Honolulu, is a trade acceptance rather than a

banker's acceptance.
(Informal Ruling, Page 404, December, 1915,

£jy JS iU£

°n

Bulletin.)

ELIGIBLE DRAFTS AND TRADE

ACCEPTANCES
Statutory Provisions
defined in the laws as follows:
bills of exchange issued or
drawn for agricultural, industrial, or commercial
purposes, or the proceeds of which have been used,
or are to be used, for such purposes, the Federal
Reserve Board to have the right to determine or define the character of the paper thus eligible for discount, within the meaning of this Act. Nothing in
this Act contained shall be construed to prohibit
such notes, drafts, and bills of exchange, secured by
staple agricultural products, or other goods, wares,
or merchandise from being eligible for such disissued
notes, drafts, or bills
count; [or]
Eligible paper

is

"Notes, drafts, and

.

.

.

.

.

.

Commercial paper,

Agricultural and

commod,ty paper

'

Commercial Banking Practice

80
Paper based on
United States
obligations.

for the purpose of carrying or trading in
bonds and notes of the Government of the
United States."

or
.

drawn

.

.

(Federal Reserve Act, Section IS.)
Paper based en
bonds of War
Finance Corporation.

"The Federal reserve banks shall be authorized,
subject to the maturity limitations of the Federal
Reserve Act and to regulations of the Federal Reto rediscount eligible paper
serve -Board
bonds [of the War Finance Corsecured by
poration] and indorsed by a member bank."

...

.

.

.

(War Finance Corporation

Act, Section 13.)

Regulations of Federal Reserve Board
Conditions of
eligibility.

Commercial
origin.

The Federal Reserve Board, exercising its statutory right to define the character of a note, draft, or
bill of exchange eligible for rediscount at a Federal
reserve bank, has determined that:
It must be a note, draft, or bill of exchange, the
proceeds of which have been used or are to be used
in producing, purchasing, carrying, or marketing
goods* in one or more of the steps of the process of
production, manufacture, or distribution;
It may be secured by the pledge of goods or
collateral, provided it is otherwise eligible.
(Regulations of Federal
Series of 1917, A, II.)

Reserve Board,

Regulation

A,

Opinions and Rnlings
Based on

retail

transactions.

A bill of exchange

drawn by the seller of goods
the purchaser of those goods is a
and accepted by
trade acceptance, regardless of whether or not the
purchaser intends to resell the goods or to use them
* When used in this regulation the word "goods" shall be
construed to include goods, wares, merchandise, or agricultural
products, including live stock.

faiBBISCOUNTS

81

for his own purpose.
Therefore, a retail dealer
finance the sale of his goods to a retail customer by means of the trade acceptance.
(Informal Ruling, Page 30, January, 1918, Bulletin.)

may

An

acceptance drawn by a gas r
producing com&
-....i,. J
J
a J
pany on a gas distributing company and accepted
by the latter in payment for gas sold and delivered
is a trade acceptance, eligible for rediscount by a
Federal reserve bank.
(Informal Ruling, Page 435, May, 1918, Bulletin.)

a s ed on

?
delivery
,.

Regarding the use of trade acceptances in con- ^asned
nection with the sale of coffee mills, etc., on an in-

and

* ale

of gas.

"
° n in8 aH

}

stallment plan, if the purchaser is willing to accept
a draft in advance of the delivery of the goods there
would seem to be no reason why such an acceptance
should not be treated on the same basis as a bill
drawn and accepted after delivery of such goods.
(Informal Ruling, Page 437, May, 1918, Bulletin.)

Drafts drawn for the purchase price of electrical
p
ii
goods, which include the cost of installation, may
be treated as trade acceptances when such drafts
are accepted by the purchaser.

,.,.,,

,

.

•

?

as ed °? electrical
£

installation.

(Informal Ruling, Page 310, April, 1918, Bulletin.)

A

draft drawn bv a lumber corporation upon a
.•
•.
j*
i
l
j
i_
j.u
sales corporation which it and a number of other
lumber concerns have organized will, when accepted, become a trade acceptance, even though the
selling corporation is a stockholder of the sales corporation, provided the latter is organized in good
faith and not merely to act as an agent for the purpose of evading the law.
(Opinion of Counsel, Page 33, January, 1918, Bulletin.)
•

i

A bill

drawn by a
i

retail dealer
t

n

-i

on

iii
customer

his retail cus-

sale of goods to that
a trade acceptance within the meaning of the
Board's regulations, even though it is drawn after

tomer to finance the
is

Acceptances of
sales corporations.

Acceptances

in

liquidation ot

0P en accounts,

Commercial Banking Practice

82

the purchaser has failed to remit promptly on an
open account.
The Board is of the opinion, however, that the
attempt to use a trade acceptance in this manner as
a means of liquidating an otherwise slow account
would involve considerable danger to the primary
purposes of the trade acceptance movement and
would subordinate the trade acceptance to the open
account by suggesting it as a last resort for bad
debts.

While, therefore, trade acceptances of this character should probably be considered eligible as a
matter of law, nevertheless member banks and Federal reserve banks should be encouraged to discriminate against them as far as possible.
(Informal Ruling, Page SO, January, 1918, Bulletin.)

Acceptances based
on advertising space.

The Federal Reserve Board may properly rule
that a draft or bill of exchange drawn by the seller
on the purchaser of advertising space and accepted
by such purchaser is a trade acceptance.
(Opinion of Counsel, Page 116, February, 1917, Bulletin.)

Conditions.

A

draft or bill of exchange drawn by a publisher
or other advertising agency on the purchaser of advertising space, and accepted by such purchaser,
shall be considered a trade acceptance provided the
advertisement on which the draft or bill is based is
for the purpose of promoting or facilitating the
production, manufacture, distribution, or sale of
goods, whether merchandise or agricultural products, including live stock, and provided, further,
that such advertisement is not illegal and is not for
the purpose of promoting or facilitating any transaction which is prohibited by the laws of the state
in

which

it is

to be

consummated.

(Informal Ruling, Page 114, February, 1917, Bulletin.)

Rediscounts

83

Acceptances Based on Foreign Transactions.
ased °"
fact that importation or exportation is in- fr a n s ac t
volved does not exclude the character of a trade ac-

The

^

port

ceptance, and trade acceptances originating through
importation from foreign countries, which are indorsed by banks or bankers, may be taken within
the range of the discount rates for bankers' acceptances.
(Informal Ruling, Page 168, April, 1916, Bulletin.)
for the purpose of providing funds
for the purchase and export of cross-ties and lumber to Cuba are eligible for rediscount if properly
indorsed and otherwise conforming to the regulaBills

drawn

^p™ "
1

6

tions of the Federal Reserve Board.
(Informal Ruling, Page 268, September, 1915, Bulletin.)

INELIGIBLE DRAFTS AND TRADE

ACCEPTANCES

Statutory Provisions

"Such

definition [of

paper

shall not include notes,

eligible for rediscount]

Security paper,

drafts, or bills covering

merely investments or issued or drawn for the purpose of carrying or trading in stocks, bonds, or
other investment securities, except bonds and notes
of the United States."
(Federal Reserve Act, Section 13.)

Regulations of the Federal Reserve Roard

The paper must not be

a note, draft, or

bill

of

exchange, the proceeds of which have been used or
are to be used for permanent or fixed investments
of any kind, such as land, buildings, or machinery.
The paper must not be a note, draft, or bill of
exchange, the proceeds of which have been used or
are to be used for investments of a purely speculative character.
(Regulations of Federal
Series of 1917, A, II.)

Reserve

Board,

Regulation

A,

Notes for

JJ™^^'
investments,

Commercial Banking Practic

84

Opinions and Rulings
Acceptances
based on future
purchases.

A

bill,

in order to be a trade acceptance,

arise out of the

purchase

is

must

purchase of goods, and unless that

either

consummated or actually con-

bill is drawn, it is doubtcan properly be said that the obligation arises out of the purchase of goods.

tracted for at the time the
ful whether

it

(Informal Ruling, Page 378, May, 1917, Bulletin.)

The Board's conception

Drafts to finance
capital requirements.

of the trade acceptance

that it is an instrument which carries upon its
face the evidence of the commercial character of the
transaction which gave it birth. The finance paper
Corporation issued against drafts
of the
drawn by it on dealers and placed in trust to secure
such paper issued by it in the shape of notes or
certificates gives no indication whatever as to the
is

nature of the security, which may or may not be
eligible paper.
CorporaIt appears to the Board that the
tion by issuing notes of this character is really raising money for capital requirements for similar
transactions in the future, and that the whole plan
is in essence a finance operation rather than a

commercial transaction.
(Informal Ruling, Page 109, February, 1918, Bulletin.)
payment

Drafts in
of insurance

premiums.

A

draft drawn by a casualty company against a
policyholder for premiums could hardly be said to
be a draft by the seller on the purchaser of goods
sold and would not, in the opinion of the Board,
come within the Board's present definition of a

trade acceptance.
(Informal Ruling, Page 309, April, 1918, Bulletin.)

EVIDENCE OF ELIGIBILITY
Regulations of Federal Reserve Board

A

Character of
evidence.

it

Federal reserve bank shall take such steps as

deems necessary

to satisfy itself as to the eligibil-

Rediscounts

85

ity of the draft or bill offered for rediscount, unless

presents prima facie evidence thereof or bears
a stamp or certificate affixed by the acceptor or
drawer showing that it is a trade acceptance.

it

(Regulations

of

Federal

Reserve

Board,

Regulation

A,

Series of 1917, A, V.)

Opinions and Rulings

The fact that a land company has stamped a bill
a trade acceptance and has signed such statement
as "acceptor" does not in itself make it a trade acceptance. The bill was accepted by the bank and
not by the land company and is therefore not eligible for purchase as a trade acceptance under the
regulation which requires a bill to be accepted by
the drawee.

^TuT™" "has
no value,

(Informal Ruling, Page 112, March, 1916, Bulletin.)

MATURITY
StatutorylProvisions
"Notes, drafts, and bills admitted to discount
under terms of this paragraph must have a maturity at the time of discount of not more than ninety
Provided, that
days, exclusive of days of grace
:

and

drawn

or issued for agricultural purposes or based on live stock and having a maturity not exceeding six months, exclusive
of days of grace, may be discounted in an amount to
be limited to a percentage of the assets of the Federal reserve bank, to be ascertained and fixed by the

notes, drafts,

bills

Commercial paper,

Agricultural or Iive
stoc

paper *

Federal Reserve Board."
(Federal Reserve Act, Section IS.)

Regulations of Federal Reserve Roard
draft or trade acceptance must have a "maturity at the time of discount of not more than

The

2[*"

rit

Ja

°(

Commercial Banking Practice

86

ninety days, exclusive of days of grace; but if
issued for agricultural purposes or based
on live stock, it may have a maturity at the time of
discount of not more than six months, exclusive
of days of grace."

drawn or

Maturity of
six months.

(Regulations

of

Federal

Reserve

Board,

Regulation

A,

Series of 1917, A, I.)

Opinions and Rulings
Drafts payable

on condition.

A

draft made "payable on arrival of car" is nonnegotiable, not being payable at a determinable
future time, and is therefore ineligible for rediscount by a Federal reserve bank.
(Opinion of Counsel, Page 219, August, 1915, Bulletin.)

Drafts payable

"on or before"
certain date.

Drafts payable "ninety days from date or before
on five days after demand (i.e., on five days' notice)
by the holder hereof" are negotiable and eligible for
discount with a Federal reserve bank.
(Opinion of Counsel, Page 291, April, 1917, Bulletin.)

Demand

drafts.

Extension.

A

demand note or bill is not eligible under the
provisions of the Act, since it is not in terms payable within the prescribed ninety days, but, at the
option of the holder, may not be presented for payment until after that time.
If the bill were altered so as to read "on or before
days from date, pay to the order of ourselves,"
etc., it would come within the terms of the law and
would be eligible for rediscount.
(Informal Ruling, Page 378, May, 1917, Bulletin.)

"A note or draft containing a provision for an
extension of time should not be approved for general use by the Federal Reserve Board."
(Opinion of Counsel, Page 870, September, 1918, Bulletin.)

Rediscounts

(

AMOUNT OF PAPER OF ONE INTEREST
REDISCOUNTARLE FOR ONE

MEMRER RANK
Statutory Provisions

"The aggregate of such notes, drafts, and bills
bearing the signature or indorsement of any one
borrower, whether a person, company, firm, or corporation, rediscounted for any one bank shall at
no time exceed ten per centum of the unimpaired
capital and surplus of said bank; but this restriction shall not apply to the discount of bills of exchange drawn in good faith against actually existing values."

Ten per cent
hmlt '

Exception,

(Federal Reserve Act, Section 13.)

Regulations of Federal Reserve Roard
of notes, drafts, and bills bearn
i_
the signature or indorsement ot any one borrower, whether a person, company, firm, or corporation, rediscounted for any one member bank, shall
at no time exceed ten per cent of the unimpaired

"The aggregate
&&
fc>

mg

Ten per cent

7

,

capital and surplus of such bank; but this restriction shall not apply to the discount of bills of exchange drawn in good faith against actually exist-

limit.

Exception,

ing values."
(Regulations of Federal
Series of 1917, A, I.)

Reserve Board,

Regulation

A,

Opinions and Rulings
What

Constitutes "Actually Existing Values."

A bill of exchange

discounted before acceptance
may be said to be drawn against actually existing
values, within the meaning of section 18 of the
Federal Reserve Act, when and on^ when it is

Drafts

1

^

c ou n t e d

^e

t

i

nce

Commercial Banking Practice

88

accompanied by shipping documents, warehouse receipts, or other papers securing title to the goods
sold.
Trade acceptances.

An accepted bill of exchange, unaccompanied by
shipping documents or other such papers, may be
considered as drawn against actually existing
values if drawn against the drawee at the time of,
or within a reasonable time after, the shipment or
delivery of the goods sold. In
must be reasonable grounds

this latter case there

to believe that

the

goods are in existence in the hands of the drawee
either in their original form or in the shape of the
proceeds of their

sale.

(Opinion of Counsel, Page 195, March, 1917, Bulletin.)
Trade acceptances
for long standing

open accounts.

Evidence of
"actually existing

value."

A

bill drawn for a balance due on open account
of long standing, which is accepted by the debtor,
might constitute a trade acceptance, but in order
for it to be excepted from the limitations imposed
by section 13 of the Federal Reserve Act as a bill of
exchange drawn against actually existing value, it
must have been drawn contemporaneously with, or
within such a reasonable time after, the shipment of
the goods as to justify the assumption that the
goods are in the hands of the drawee in their original
form or in the form of proceeds of sale.
As evidence of this fact, Federal reserve banks
might reasonably require such trade acceptances as
are offered as "bills of exchange drawn against
actually existing value" to show the date of invoice,
so that it may be determined whether or not the account is one of long standing.

(Informal Ruling, Page 287, April, 1917, Bulletin.)
Qualified

acceptances.

A

bill of exchange drawn payable "at sight" and
accepted payable in three months is a qualified or
conditional acceptance, and the maker and prior
indorsers are released.
The instrument in effect
becomes the promissory note of the acceptor, and

Rediscounts
would not come within the exception to section 5200
[or section 13] as a "bill of exchange" drawn in
good faith against actually existing value.
(Opinion of Counsel, Page 463, September, 1916, Bulletin.)

For additional opinions and rulings under this
heading, but relating also to promissory notes, see
pages 68-72, above.

AGGREGATE AMOUNT REDISCOUNTABLE FOR ONE BANK
See "Rediscount of Promissory Notes," pages
72-73, above.

INDORSEMENT OF MEMBER BANKS
See "Rediscount of Promissory Notes," page
73, above.

REDISCOUNTS FOR NONMEMBER

BANKS
See "Rediscount of Promissory Notes," pages
73-75, above.

89

90

Rediscount of Six Months'
Agricultural Paper
DEFINITION
Regulations of Federal Reserve Roard
Live stock
paper included.

Six months' agricultural paper, within the meaning of this regulation, is defined as a note, draft,
bill of exchange, or trade acceptance drawn or issued for agricultural purposes, or based on live
stock; that is, a note, draft, bill of exchange, or
trade acceptance, the proceeds of which have been
used, or are to be used, for agricultural purposes,
including the breeding, raising, fattening, or marketing of live stock, and which has a maturity at
the time of discount of not more than six months,
exclusive of days of grace.
(Regulations of Federal
Series of 1917, A, VI.)

Reserve

Board,

Regulation

A,

Opinions^and Rulings
Live stock.

Notes of cattle
dealers.

The term "live stock" is held to include not only
beef cattle, but also horses and mules.
(Informal Ruling, Page 72, June, 1915, Bulletin.)
Notes made by mule and cattle dealers are mercantile rather than agricultural paper.
(Informal Ruling, Page 212, August, 1915, Bulletin.)

Notes of imple-

ment dealers.

A

note made by a dealer in agricultural implements is not agricultural paper.
(Informal Ruling, Page 212, August, 1915, Bulletin.)

Agricultural

products or
implements.

The purchase or sale of an agricultural product,
or of implements or other commodities used in
agriculture, constitutes a commercial transaction.

Rediscounts

91

the proceeds of a note made by a merchant
are used to purchase millet seed to be later retailed
or sold, such a note can not be treated as one given
for an agricultural purpose and can not be discounted by a Federal reserve bank if it has a maturity at time of discount of more than 90 days.

Where

(Opinion of Counsel, Page 526, October, 1916, Bulletin.)

or note of a packing company, the proif
r
i
j i>
5
1
ceeds of which are used tor the purchase ot live
stock which is slaughtered upon purchase, is not
"based on live stock" within the meaning of section 13, and is, therefore, not eligible for rediscount
if it has a maturity in excess of 90 days.

The

bill
p

i

i

•

or bills cf
Not
f»
packing company.

(Opinion of Counsel, Page 616, August, 1917, Bulletin.)

ELIGIBLE AGRICULTURAL PAPER
Statutory Provisions
"Notes, drafts, and bills drawn or issued for
agricultural purposes or based on live stock and
having a maturity not exceeding six months, exclusive of days of grace, may be discounted in an
amount to be limited to a percentage of the assets
of the Federal reserve bank, to be ascertained and
fixed by the Federal Reserve Board."

Afrieji^oa

(Federal Reserve Act, Section 13.)

Regulations of Federal Reserve Board
eligible for rediscount six months' agricultural paper, whether a note, draft, bill of exchange,

To

be

or trade acceptance, must comply with the respective sections of this regulation* which would apply
* For conditions of eligibility of promissory notes, see pages
trade
56-61, above. For conditions of eligibility of drafts and
79-83, above.
acceptances, see pages

Conditions of

e,gI 1,ty *

Commercial Banking Practice

>2

to

it if its

maturity were 90 days or

Federal
(Regulations
Series of 1917, A, VI.)
of

Reserve

less.

Boards

Regulation

A,

Opinions and Rulings
'otes for
ertilizer.

A farmer's

six months' note for commercial ferdiscounted and indorsed by a member bank,
is agricultural paper eligible for rediscount with
the Federal reserve bank.
tilizer,

(Informal Ruling, Page 75, June, 1915, Bulletin.)
lattle

mortgages.

lhattel

mortgages

nnecessary.

Mortgages on cattle are not required, and the
question whether paper secured by cattle is selfliquidating is a legal one to be determined at the
Federal reserve bank.
(Informal Ruling, Page 74, June, 1915, Bulletin.)

The Act does not

require the taking of chattel

mortgages as security for loans based on agricultural operations.

bank

The

to this
direct,

The statement

effect

of the

member

must ordinarily be accepted.

primary purpose of the loan should be

for the ordinary operations of agriculture. Words
"based on" are not considered synonymous with

Agricultural paper need not be diby agricultural products, but should
be genuinely based upon transactions entered upon
for agricultural operations. General banking prudence and knowledge should be applied.
"secured by."

rectly secured

(Informal Ruling, Page 72, June, 1915, Bulletin.)
fotes for
lairy cattle.

Notes signed by a farmer, the proceeds of which
are used for the purchase of cows to be used as dairy
cattle, are eligible for rediscount at the discretion
of the Federal reserve bank notwithstanding the
fact that the cattle are not primarily purchased for
"breeding, raising, fattening, and marketing of
live stock."

(Informal Ruling, Page 112, March, 1916, Bulletin.)

Rediscounts
Loans on

cattle for breeding, grazing, or fattenbe made under the classification of six

ing may
months' agricultural paper and the paper may be
rediscounted by a member bank at its Federal reserve bank.

93
CatUe ^breeding,
fattening,

(Informal Ruling, Page 679, December, 1916, Bulletin.)

tractors are used to supplement the work
of horses or mules, or are used altogether instead of
these animals, it is held that notes given by farmers
for the purchase price of tractors, and maturing
within six months, should be admitted to discount

Where

I

°t

Ja r

"
l

J^ lors

as agricultural paper.
(Informal Ruling, Page 309, April, 1918, Bulletin.)

Farmers' notes, the proceeds of which are used
for tilling farms or for draining land already in use
as farm land, should be classified as agricultural
paper and are eligible for rediscount.
(Informal Ruling, Page 743, August, 1918, Bulletin.)

A

note given for the purchase price of a commodity can be classed as agricultural paper eligible
for rediscount when having a maturity in excess of
90 days, if the maker is to use the commodity for
an agricultural purpose, regardless of whether the
note

is

Farmers' notes,

Discount by

discounted by the maker or by the indorser.

(Opinion of Counsel, Page 312, April, 1918, Bulletin.)

Where
seller of a

makes his note payable to the
commodity, and actually uses the com-

a farmer

Paper

w^J^

modity for agricultural purposes, such a note may
be treated as agricultural paper, whether discounted with the member bank by the farmer as the
maker or by the seller as the indorser.
Where the farmer makes his note t pavable to the Paper payable
«to bank.
a
member bank and uses the proceeds lor an agri-,

paper.

may

likewise be disas agricultural
either of the foregoing cases
If, however, in

cultural purpose, such a note
counted by a Federal reserve

bank

Commercial Banking Practice

>4

the farmer does not use or intend to use the commodity purchased for an agricultural purpose, although it is capable of being so used, the note in
question should be treated as commercial paper and
not as agricultural paper.
(Informal Ruling, Page 310, April, 1918, Bulletin.)
dentification of

gricultural paper.

The nature of the bill, the name of the acceptor,
and the name of the drawer would probably indicate
that a farmer was the purchaser, and an implement
dealer, the seller of the goods. However, the purchasing member bank will have to satisfy itself in
some satisfactory way that the bill is substantially

A

simple memoranof an agricultural character.
dum attached to the bill, stating that the bill was
drawn in payment of agricultural implements,
signed either by the acceptor or the drawer, would
probably be considered sufficient evidence by the
member bank and the Federal reserve bank.
(Informal Ruling, Page 68, February, 1916, Bulletin.)

AMOUNT OF PAPER REDISCOUNTABLE BY A FEDERAL RESERVE
BANK
Statutory Provisions
Discretion of

Federal Reserve
Board.

Notes, drafts, and bills drawn or issued for agricultural purposes or based on live stock, and having a maturity not exceeding six months, exclusive
of days of grace, may be discounted in an amount
to be limited to a percentage of the assets of the
Federal reserve bank, to be ascertained and fixed

by the Federal Reserve Board.
(Federal Reserve Act, Section 13.)

Opinions and Rulings
Limit of agricultural
tabIe
a
r re

b^

^

se r

vtb auk

The law prescribes that in the aggregate the
amount of agricultural paper purchased by a

total

Federal reserve bank should not exceed a fixed per-

Rediscounts

95

centage of its capital stock, to be fixed from time to
time for each Federal reserve bank by the Federal
Reserve Board. The percentage fixed by the Board
differs in the various districts.
Whenever a district has applied, the maximum limit has been
granted, which has been considered to be 99 per
cent of the capital stock.
(Informal Ruling, Page 68, February, 1916,

Bulletin.)

For other provisions governing the rediscount of
agricultural paper, see pages 68-75, above.

96

Rediscount of Commodity Paper
DEFINITION
Regulations of Federal Reserve Board
Commodity
paper defined.

Commodity paper within the meaning of this
regulation is defined as a note, draft, bill of exchange, or trade acceptance accompanied and secured by shipping documents or by a warehouse,
terminal, or other similar receipt covering approved
and readily marketable, nonperishable staples properly insured.
(Regulations of Federal
Series of 1917, A, VII.)

Reserve

Board,

Regulation A,

Opinions and Rulings
'Staples" defined.

''Staples" include manufactured goods as well as
materials, provided the goods are nonperish-

raw

able and have a wide ready market. This is held
to include cotton yarns and flour.
(Informal Ruling, Page 523, October, 1916, Bulletin.)
Paper of merchants included.

Potatoes a
"staple."

"Commodity paper"

includes not only paper
originating with the producer, but also paper of
merchants and others when the commodity is
not carried for speculative or purely investment
purposes.
(Informal Ruling, Page 307, October, 1915, Bulletin.)

Potatoes, properly graded and packed and stored
in a weatherproof and responsible warehouse, as
evidenced by its receipt, would undoubtedly constitute a readily marketable, nonperishable staple.
(Informal Ruling, Page 614, August, 1917, Bulletin.)

Rediscounts

97

Drafts drawn in connection with sales to the
United States Government of lumber or other
materials do not conform to the requirements of
commodity paper as defined by the Federal Reserve
Board.

Drafts dra

yn

states excluded,

(Opinion of Counsel, Page 32, January, 1918, Bulletin.)

ELIGIBLE COMMODITY PAPER
Statutory Provisions

Nothing

in this

Act contained shall be construed
and bills of exchange se-

Eligibility,

to prohibit notes, drafts,

cured by staple agricultural products or other
goods, wares, or merchandise from being eligible
for such discount.
(Federal Reserve Act, Section 13.)

Regulations of Federal Reserve Board

To

be eligible for rediscount at the special rates
authorized to be established for commodity paper,
such a note, draft, bill of exchange, or trade acceptance must also comply with the respective sec-

must conform to the requirements of the Federal reserve
bank relating to shipping documents, receipts,
insurance, etc., and must be a note, draft, bill of
exchange, or trade acceptance on which the rate
tions of this regulation applicable to it,*

—

including commission
of interest or discount
charged the maker, does not exceed six per cent

per annum.
(Regulations

of

Federal

Reserve

Board,

Regulation

A,

Series of 1917, A, VII.)

* For conditions of eligibility of promissory notes, see pages
56-61, above. For conditions of eligibility of drafts and trade
acceptances, see pages 79-83, above.

in

c n di ti on$
?

.

.

.

e IgI

!

'

y'

of

Commercial Banking Practice

9S

Opinions and Rulings
Direct discounts
not allowed.

Federal reserve banks can not discount commodpaper directly for mercantile firms.

ity

(Informal Ruling, Page 112, March, 1916, Bulletin.)
Drafts drawn in
sales to United
States ineligible.

Drafts drawn in connection with sales to the
United States Government of lumber or other materials can not be treated as bills of exchange drawn
against actually existing value and are subject to
the limitations of section 5200, Revised Statutes,
when discounted by national banks. Such drafts
do not conform to the requirements of commodity
paper as defined by the Federal Reserve Board
and should not be discounted at the rate prescribed
for such paper.
(Opinion of Counsel, Page 32, January, 1918, Bulletin.)

SUSPENSION OF SPECIAL RATE ON

COMMODITY PAPER
Regulations of Federal Reserve Roard
Rate for movement of crops.

As the special rate on commodity paper is intended to assist actual producers during crop-moving periods and is not designed to benefit speculators, the Board reserves the right to suspend the
special rates herein provided whenever it is apparent that the movement of crops, which this rate
is intended to facilitate, has been practically completed.
(Regulations of Federal
Series of 1917, A, VII.)

Reserve

Board,

Regulation

A,

99

Rediscount of Bank Acceptances
DEFINITION
Regulations of Federal Reserve Board

A

banker's acceptance within the meaning of
this regulation is defined as a draft or bill of exchange of which the acceptor is a bank or trust
company, or a firm, person, company, or corporation engaged in the business of granting bankers'
acceptance credits.
(Regulations

of

Federal

Reserve

Board,

Regulation

a n ke

^c c e

*

la ce

A,

Series of 1917, B.)

Opinions and^ Rulings

The

question of determining the eligibility of an
acceptor under the regulation is left to the discretion of Federal reserve banks themselves. It is, of
course, understood that the Board would not wish
to see concerns regarded as eligible acceptors which
are not in the habit of carrying on some acceptance
business regularly and are not generally of such
character and standing as to qualify their acceptance as a "banker's acceptance."
(Informal Ruling, Page 362, November, 1915, Bulletin.)

A

of exchange, in order to be negotiable,
must be an unconditional order to pay, on demand
or at a fixed or determinable future time, a certain
sum of money to order or to bearer. If payment is
dependent upon the happening of a certain contingency, the bill is conditional and nonnegotiable.
If payment is confined to the proceeds of a particular fund and is not chargeable to the general credit
bill

Eligible

accep

01

^°

Con

s

of

1 it

Conditional

bill.

Commercial Banking Practice

100

of the drawer, the bill
negotiable.
Conditional
acceptance.

is

conditional and non-

A

general acceptance of a conditional bill or
a conditional acceptance of an unconditional bill
makes the acceptance a conditional one and destroys

its

negotiability.

(Opinion of Counsel, Page 21, May, 1915, Bulletin.)

ELIGIBLE BANK ACCEPTANCES
Statutory Provisions
Conditions of
eligibility.

"Any Federal reserve bank may discount acceptances of the kinds hereinafter described, which have
a maturity at the time of discount of not more than
three months' sight, exclusive of days of grace, and
which are indorsed by at least one member bank."
(Federal Reserve Act, Section 13.)

Regulations of Federal Reserve Board
Maturity.

Any

may discount for any
bankers' acceptances which
have a maturity at the time of discount of not more
than three months' sight, exclusive of days of grace,
which are indorsed by at least one member bank,
and which grow out of transactions involving the
importation or exportation of goods or which grow
out of transactions involving the domestic shipment
of goods, provided shipping documents are attached
at the time of acceptance; or which are secured at
the time of acceptance by a warehouse receipt or
other such document conveying or securing title
covering readily marketable staples. Any Federal
reserve bank may also acquire drafts or bills of exchange drawn on member banks by banks or bankers in foreign countries or dependencies or insular
possessions of the United States for the purpose of
furnishing dollar exchange.
of

Indorsement.

Based on imports
and exports.

Based on domestic
shipments.

Secured by
documents.

Drawn

to furnish

dollar

exchange.

its

Federal reserve bank

member banks

;

Rediscounts

101

To be eligible for rediscount the bill must have
been drawn under a credit opened for the purpose
of conducting, or settling accounts resulting from,
a transaction or transactions involving:
The shipment of goods between the United
( 1 )
States and any foreign country, or between the
United States and any of its dependencies or insular possessions, or between foreign countries or
The domestic shipment of goods, pro(2)
vided shipping documents are attached at the time
of acceptance or
It must be a bill which is secured at the
(3)
time of acceptance by a warehouse receipt or other
such document conveying or securing title covering
readily marketable staples.
Any Federal reserve bank may also ac(4)
quire drafts or bills drawn by a bank or banker in
a foreign country or dependency or insular possession of the United States for the purpose of furnishing dollar exchange and accepted by a member
bank. Such drafts or bills may be acquired prior
to acceptance provided they have the indorsement
of a member bank.

Base d on exports
an ,mporls '
.

;

Based on domestic
'

Ipments *

;

(Regulations of
Series of 1917, B.)

Federal

Reserve

Board,

Regulation

Based on wareouse recelpts -

& r * wn

t0 * urnish
ar exc ange
'

°

A,

Opinions and Rulings
There is some doubt in the courts whether the
„
J
mere reference to a particular consignment of goods
makes the bill conditional, some courts stating that
it is merely an indication of the fund out of which
the drawee is to reimburse himself; other courts
holding that it makes the bill conditional because
.

limiting

payment

•

l

•

j

j?

to the proceeds of the particular

There is no doubt, however,
to.
that a reference, in general terms, on the face of an
accepted bill to the fact that it is based on the exshipment referred

e ren ce t0 fact
f*«( .
bl " IS

,

based
on imports or
«?<>**»•

102

Commercial Banking Practice
portation or importation of goods would not make
it conditional and nonnegotiable, and it would not,
therefore, be ineligible for discount under the provisions of section 13 of the Federal Reserve Act.
(Opinion of Counsel, Page 21, May, 1915, Bulletin.)

Acceptances
indorsed by member
bank of another
district.

Federal reserve banks may, under the provisions
of section 13, discount acceptances based on the importation or exportation of goods, provided they
have a maturity at time of discount of not more
than three months, and provided, further, that they
are indorsed by at least one member bank. It is immaterial whether this member bank is located in the
district of the Federal reserve bank which is making the discount or in any other district, the term
"member bank" being broad enough to include
member banks wherever located.
(Opinion of Counsel, Page 98, June, 1915, Bulletin.)

Discount of
acceptances not
paid at Federal
reserve bank.

discount committee of the Federal Reserve
has reported that, in its opinion, "Federal
reserve banks should insist that acceptances when
due should be paid by checks on the local Federal
reserve bank, in order that they may be charged to
the account of the acceptor on the day of maturity,
or else that acceptances should be paid by checks
through the clearings. If an arrangement on these
lines can not be perfected, Federal reserve banks
ought to be required to add one day to the actual
number of days the acceptance has to run when
bought, so as to make up for the loss of interest

The
Board

incurred in collecting in this manner."
This report has been agreed to by the Board, and
your bank is requested, in buying acceptances, to
charge discount for one additional day, except in
cases where satisfactory arrangements are made to
make actual cash payment at the Federal reserve

bank on the day of maturity.
(Informal Ruling, Page 521, June, 1918, Bulletin.)

Rediscounts

103

Acceptances of an acceptance corporation ought
*

Till
to be dealt with exactly as would be the acceptances

Pa P er of acc «p*ance corporation.

of a prime private banker. These acceptance corporations are in the same relation to the Federal
Reserve System as the private bankers. They can
not become members, but, inasmuch as they expect
to give full information about their own financial
standing and the nature of their acceptances, and
as they exercise a most important function for the

further development of our acceptance business and
discount market, their operation ought to be en-

couraged in every respect.
(Informal Ruling, Page 634, July, 1918, Bulletin.)

In purchasing or discounting bankers' acceptbills which are secured by warehouse

ances or other

^n&en^
warehouses,

the Federal reserve banks should
make sure that the receipt is issued by a warehouse
which is independent of the borrower.
(Informal Ruling, Page 30, January, 1917, Bulletin.)
receipts,

etc.,

"goods" within the meaning of
tion 13 of the Federal Reserve Act.

Gold coin

is

sec-

Gold coin as "good*."

(Informal Ruling, Page 29, January, 1917, Bulletin.)

Gold bars

may
J

be

properly
J
r r

considered

as

Gold bullion
as "goods.

goods.
(Informal Ruling, Page 29, January, 1917, Bulletin.)

While a very decided

differential

may

be inadyis-

no objection to a moderate differential,
say J4 of 1 per cent, to apply between memberbank acceptances and the acceptances of large nonmember institutions well known throughout the
country and whose acceptances necessarily have a
broad market.
able, there is

(Informal Ruling, Page 28, January, 1917, Bulletin.)

additional opinions and rulings bearing on
this subject, see Part I, "Bank Acceptances," pages
16-21, 29-31, 33-35, 38-42, above.

For

ra

^fj^S b
acceptances,

*
k

Commercial Banking Practice

104

INELIGIBLE

BANK ACCEPTANCES

Opinions and Rulings
battel mortgages.

Sills

payable

suiside United
States.

The Board, having reached the conclusion that
national banks are not authorized to accept bills
secured by chattel mortgages on cattle, deems it
advisable that Federal reserve banks should consider as ineligible bills drawn against the security
of such chattel mortgages, whether accepted by
member or nonmember banks.
(Informal Ruling, Page 309, April, 1918, Bulletin.)

Under

the regulations of the Federal Reserve

Board defining bankers' acceptances, any bill which
is payable elsewhere than in the United States
would not be eligible for purchase as a bankers' ac-

A

ceptance, under the provisions of Regulations
and B, Series of 1917, even though eligible in all
other respects.
The acceptance, however, might properly be purchased as a bill of exchange payable in a foreign
country.
""(Informal Ruling, Page 520, June, 1918, Bulletin.)

For

additional opinions and rulings bearing on

this subject, see

Part

I,

"Bank Acceptances," pages

16-21, 29-31, 33-35, 38-42, above.

EVIDENCE OF ELIGIBILITY
Regulations of Federal Reserve Board
Evidence furnished Federal
reserve bank.

A

Federal reserve bank must be satisfied, either
by reference to the acceptance itself or otherwise,
that

it is

dence of

Satisfactory evistamp or cer-

eligible for rediscount.
eligibility

tificate affixed

may

consist of a

by the acceptor

in

form

satisfactory

to the Federal reserve bank.
(Regulations of
Series of 1917, B.)

Federal

Reserve

Board,

Regulation

A,

Rediscounts

105

Opinions and Rulings

The Federal reserve bank reserves the right to
ask State member banks for evidence underlying

J^J^

the certification given to it, and the bank examiner
may require evidence from the national bank.
Member banks would, therefore, best protect themselves by stipulating for themselves the right at
times to" ask for substantiation of the assurances

given by their customers.
(Informal Ruling, Page 406, December, 1915, Bulletin.)

MATURITY
Statutory Provisions
"Any Federal reserve bank may discount accept-

Three months,

which have a maturity at the time of disa? tees
count of not more than three months' sight, exclusive of days of grace."
.

.

.

(Federal Reserve Act, Section IS.)

Regulations of Federal Reserve Board
Federal reserve banks may discount for their
member banks "bankers' acceptances which have a
maturity at the time of discount of not more than
three months' sight, exclusive of days of grace.
>>

(Regulations

of

Federal

Reserve

Board,

Regulation

A,

Series of 1917, B.)

Opinions and Rulings
Acceptance business of Federal reserve banks is
not restricted "to the original transactions only," if
the transaction has not been liquidated. When the
first acceptance matures, member bank may renew
the acceptance, and there is no reason why a Federal reserve bank may not discount such renewed
acceptance, although a Federal reserve bank must
not engage in advance to make such discount of a
renewal.
(Informal Ruling, Page 126, July, 1915, Bulletin.)

Renewals.

106

Commercial Banking Practic

INDORSEMENT
Statutory Provisions
Member bank
indorsement.

Any

Federal reserve bank may discount acceptwhich are indorsed by at least one mem-

ances
ber bank.
.

.

.

(Federal Reserve Act, Section 13.)

Opinions and Rulings
Indorsement
in blank.

If the acceptance is indorsed in blank it can of
course change ownership from one holder to another without being indorsed by each subsequent
holder,

and the

title

would

pass.

expresses the hope that we may soon
reach the point when Federal reserve banks can
make a definite rule not to buy bankers' acceptances
except such as bear three responsible signatures,
being those of the acceptor, the drawer, and the

The Board

indorser.
(Informal Ruling, Page 744, August, 1918, Bulletin.)

PART

III.

Advances by Federal
Reserve Banks
on the

Promissory Notes

Member Banks

of

109

PART

III.

Advances by
Federal Reserve Banks
General Statutory Provisions
may make advances
promissory notes for
a period not exceeding fifteen days at rates to be
established by such Federal reserve banks, subject
to the review and determination of the Federal Reserve Board, provided such promissory notes are
secured by such notes, drafts, bills of exchange, or
bankers' acceptances as are eligible for rediscount
or for purchase by Federal reserve banks under the
provisions of this Act, or by the deposit or pledge
of bonds or notes of the United States."
"Any

to its

Federal reserve bank

member banks on

Maturity,

their

Security:

Eligible paper;

United states

oblation.;

(Federal Reserve Act, Section 13.)

reserve banks shall be authorized, War Finance
Corporate bond,.
subject to the maturity limitations of the Federal
Reserve Act and to regulations of the Federal Reserve Board, to discount the direct obligations of
bonds of the [War
member banks secured by

"The Federal

.

Finance] Corporation."
(War Finance Corporation

.

.

Act, Section 13.)

SECURITY
Announcements

of ^Federal

Advances may be made

to

Reserve Board

member banks on

their

promissory notes, secured either by such notes,
drafts, bills of exchange, or bankers' acceptances

JfgJ^JJJ
obligations,

Commercial Banking Practice

110

as are eligible for rediscount or purchase

by Federal

reserve banks, or by the deposit or pledge of bonds
or notes of the United States.
(Announcement of Federal Reserve Board, Page 513, October, 1916, Bulletin.)

Opinions and Rulings
Indorsement of
collateral.

Collateral of

Government bonds.

Eligible paper pledged as security for a promissory note of a member bank on which an advance is
being made by a Federal reserve bank need not be
indorsed by such member bank if such eligible paper
is already in negotiable form.
(Opinion of Counsel, Page 685, December, 1916, Bulletin.)

Any member bank which has

itself purchased obUnited States may procure advances from its Federal reserve bank, for not exceeding 15 days, on its own promissory note, provided such note is secured by a deposit or pledge of
bonds or notes of the United States.

ligations of the

(Informal Ruling, Page 159, March, 1917, Bulletin.)
County warrants
ineligible.

Member banks

in procuring advances from Fedbanks on promissory notes must secure
such notes by paper eligible for rediscount or for
purchase by Federal reserve banks or by bonds or
notes of the United States. County warrants are
eral reserve

not eligible as security.
(Opinion of Counsel, Page 609, November, 1916, Bulletin.)
Farm loan
bonds

ineligible.

Farm loan bonds are issued by Federal farm land
banks incorporated under Federal law, and are not
obligations of the United States, so that they are
not eligible as collateral for promissory notes of
member

banks.

(Opinion of Counsel, Page 33, January, 1918, Bulletin.)

For conditions of eligibility of notes, drafts, and
acceptances, see pages 56-61, 79-83, 91-94, 97-98,
100-103, above.

Advances by Reserve Banks

111

MATURITY
Statutory Provisions

Any Federal reserve bank may make advances to

Fifteen days,

its member banks on their promissory notes for
periods not exceeding fifteen days.

(Federal Reserve

Act,,

Section 13.)

Opinions and Rulings
If by reason of a State law paper falling due on
Saturday or Sunday must be collected one or two
days before its apparent maturity or one or two

Notes due on Sunday
° ! ay *
or ega

days thereafter, interest should be charged accordingly.
(Informal Ruling, Page 108, February, 1918, Bulletin.)

A Federal reserve bank may properly renew the
15-day notes of its member banks if properly secured, provided that the Federal reserve bank does
not obligate itself in advance to make any such

Renewals
permitte

renewal.
(Opinion of Counsel, Page 765, October, 1917, Bulletin.)

While the Federal Reserve Board does not wish
to prohibit the renewal of 15-day notes,

it

feels that

renewals should be the exception rather than the
rule.

(Informal Ruling, Page 879, November, 1917, Bulletin.)

^"^J

01

11

PART

J>

IV.

Open Market
Transactions

lit

PART

IV.

Open Market Transactions
General Statutory Provisions
"Any

Federal reserve bank may, under rules and
regulations prescribed by the Federal Reserve
Board, purchase and sell in the open market, at
home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals,
cable transfers and bankers' acceptances and bills
of exchange of the kinds and maturities by this
Act made eligible for rediscount, with or without
the indorsement of a member bank.
"Every Federal reserve bank shall have power

Cabie

and

transfers,

bills.

Commercial

bills.

... to purchase from member banks and to sell,
with or without its indorsement, bills of exchange
arising out of commercial transactions, as hereinbefore defined.

.

.

(Federal Reserve Act, Section 14.)

General Regulations and Rulings
Regulations of Federal Reserve Roard

The Federal Reserve Board,

exercising its statutory right to regulate the purchase of bills of exchange and acceptances, has determined that a bill
of exchange or acceptance, to be eligible for purchase by Federal reserve banks under section 14:
Must not have been issued for carrying or
(a)
trading in stocks, bonds, or other investment securities, except bonds and notes of the Government of
the United States;

Conditions
governing
Xiibfiity.

Security paper,

Commercial Banking Practice

16

speculative, or
ivestment paper.
ixed,

(b)
Must not be a bill the proceeds of which
have been used or are to be used for permanent or
fixed investments of any kind, such as land, buildings, or machinery, or for investments of a merely

speculative character;
cceptance required.

(c)

Must have been accepted by

prior to purchase by a Federal reserve

the drawee
bank unless

is accompanied and secured by shipping documents or by a warehouse, terminal, or other similar
receipt conveying or securing title;
(d)
May be secured by the pledge of goods*

it

ecured

bills.

ther

equirements.

or collateral, provided it is otherwise eligible.
In addition to the above general requirements,
each bill of exchange and trade acceptance purchased under the terms of this regulation must also
conform to the more specific requirements set forth
(see page 124), and
each bankers' acceptance must also conform to the
more specific requirements set forth under Regulation B, IV (see pages 118-119)

under Regulation B, III

(Regulations of Federal
Series of 1917, II.)

Reserve

Board, Regulation

B,

Opinions and Rulings
'romissory notes

xcluded.

The original bill for the establishment of Federal
reserve banks permitted the purchase in the open
market of "notes, drafts, and bills of exchange,"
but in the bill as finally enacted the words "notes
and drafts" were stricken out in section 14, although
they are retained in section 13. The Board has
reached the conclusion, in which it is sustained by
opinion of counsel, that Congress drew a distinction
in sections 13 and 14 between the several forms of
* When used in this regulation the word "goods" shall be
eonstrued to include goods, wares, merchandise, or agricultural
products, including live stock.

Open Market Transactions
commercial paper, and that promissory notes, even
though bearing an additional indorsement, must be
regarded as excluded from open market purchases
under section 14.
There remain, then, as eligible for purchase under

117

Eligible paper,

"cable transfers" and "bills of exchange" of two kinds (1) So-called foreign bills of
exchange; and (2) domestic acceptances drawn by
one party on another, as by a seller of goods upon
the purchaser, such as have been classified by the
Board as trade acceptances either accepted or not
accepted at the time of purchase.
The decision whether Federal reserve banks
should engage in such open market operations rests
entirely with them and not with the Federal Reserve Board.
Banks are cautioned that no bill be bought in the
open market which, even if indorsed by a member
bank, would be ineligible for rediscount under secthis

section,

:

tion 13.
(Informal Ruling, Page 360, November, 1915, Bulletin.)

Any

Federal reserve bank may, under the proFederal Reserve Act,
purchase acceptances and bills of exchange of certain kinds and maturities in the open market; but
promissory notes as distinguished from bills of exchange, whether one or more names, are not eligible
for such purchase.

Promissory notes,

visions of section 14 of the

(Opinion of Counsel, Page 365, November, 1915, Bulletin.)

The purchase

of

commodity loans from member

banks without their indorsement would not come
within the provisions of the law unless there is twoname commodity paper or such paper can be
created in connection with commodity loans.
(Informal Ruling, Page 406, December, 1915, Bulletin.)

Commodity paper,

L18

Transactions in Bank
Acceptances

DEFINITION
Regulations of Federal Reserve Roard
Banker's
acceptance.

A banker's acceptance, within the meaning of this
regulation, is a bill of exchange of which the acceptor is a bank or trust company, or a firm, person,
company, or corporation engaged in the business

of granting bankers' acceptance credits.
of

(Regulations

Federal

Reserve

Regulation

Board,

B,

Series of 1917, IV.)

ELIGIRLE RANK ACCEPTANCES
Statutory Provisions
Cable transfers
and bankers'
acceptances.

Any

Federal reserve bank

may

.

.

.

purchase

cable transfers and bankers' acceptand sell
ances ... of the kinds and maturities by this Act
.

made

.

.

with or without the inbank.

eligible for rediscount,

dorsement of a member

(Federal Reserve Act, Section 14.)

Regulations of Federal Reserve Roard
must
To be eligible for purchase, the bill
have been drawn under a credit opened for the
purpose of conducting or settling accounts resulting
from a transaction or transactions involving:
The shipment of goods between the United
( 1 )
States and any foreign country, or between the
.

Based on imports
and exports.

.

.

;

Open Market Transactions

119

United States and any of its dependencies or insular possessions, or between foreign countries
(2)

oil
states,

of goods within the United ? a$ed on shipments.
..
domestic
«n
t
c
provided the bill at the time ot its accept-

The shipment
•

-i

-i

i

..

•

i

•

accompanied by shipping documents;
storage within the United States of tlXte Receipts,
(3)
readily marketable goods, provided the acceptor of
the bill is secured by warehouse, terminal, or other
ance

is

The

similar receipt;

The

storage within the United States of
goods which have been actually sold, provided the
acceptor of the bill is secured by the pledge of such
5
T
goods;
bill drawn by a bank or
(5) Or it must be a
,
,
n
i
i
banker
a foreign country or dependency or insular possession of the United States for the purpose of furnishing dollar exchange. In this latter
case the bank or banker drawing the bill must be
in a country, dependency, or possession whose usages of trade have been determined by the Federal
Reserve Board to require the drawing of bills of
(4)

Based on pledge
of goods sold.

:

v

'

m

•

,

Drawn

to furnish

dollar exchange.

this character.
(Regulations

of

Federal

Reserve

Board,

Regulation

B,

Series of 1917, IV.)

Opinions and Rnlin^s
Gold bars may be properly considered as goods,
and accordingly 60-day bills when accepted by
banks and bankers against such shipment would be
eligible for purchase by Federal reserve banks as

BuIlion shipments

based upon or involving the exportation of goods.
(Informal Ruling, Page 29, January, 1917, Bulletin.)

coin is "goods" within the meaning of sec13 of the Federal Reserve Act; and, therefore,
tion
a bill of exchange drawn to finance a shipment of
gold coin from this country is eligible for purchase
by a Federal reserve bank if otherwise in conform-

Gold

Coin »Hp»»e»t*-

Commercial Banking Practice

20

ity

with the provisions of the law and the regulaFederal Reserve Board.

tions of the

(Informal Ruling, Page 29, January, 1917, Bulletin.)

For additional

rulings, see, under Part II, "Rediscounts with
Federal Reserve Bank," pages 100-103, above.

INELIGIBLE BANK ACCEPTANCES
Opinions and Rulings
:ceptances not
sed on sales
d not secured.

Acceptances drawn by a manufacturer on and
accepted by a trust company not a member of the
Federal Reserve System, the proceeds of which are
to be used for purchases of raw material and payment for labor where the goods had not been sold
and no warehouse receipts or other instruments
could be furnished, are held not to be eligible for
purchase by a Federal reserve bank.
(Informal Ruling, Page 65, February, 1916, Bulletin.)

:ceptances

cured by
II

of sale.

A

banker's acceptance drawn for the purpose of
purchasing goods secured by a bill of sale of stock
in hand is not eligible for purchase by Federal reserve banks.
(Opinion of Counsel, Page 684, December, 1916, Bulletin.)

Us payable outUnited States.

le

Under

the regulations of the Federal Reserve

Board defining bankers' acceptances, any bill which
is payable elsewhere than in the United
States
would not be eligible for purchase as a bankers'
acceptance, under the provisions of Regulations
and B, Series of 1917, even though eligible in all
other respects.
The acceptance, however, might properly be purchased as a bill of exchange payable in a foreign
country.
(Informal Ruling, Page 520, June. 1918, Bulletin.)

A

For additional rulings, see, under Part II, "Rediscounts with
Federal Reserve Bank," page 104, above.

Open Market Transactions

121

EVIDENCE OF ELIGIBILITY AND REQUIREMENT OF STATEMENTS
Regulations of Federal Reserve Board

A

Federal reserve bank must be satisfied either
to the acceptance itself, or otherwise,

by reference
it is

dence of

el, g lblllt y-

eligible for purchase.

Satisfactory evistamp or certificate affixed by the acceptor, in form satisfactory
to the Federal reserve bank. No evidence of eligibility is required with respect to a bill accepted by
a national bank.
Bankers' acceptances, other than those accepted
or indorsed by member banks, shall be eligible for
purchase only after the acceptor has furnished a
satisfactory statement of financial condition in form
to be approved by the Federal Reserve Board and
has agreed in writing with a Federal reserve bank
to inform it upon request concerning the transactions underlying such acceptances.
that

Evidence of

eligibility

may

(Regulations of Federal
Series of 1917, IV.)

consist of a

Reserve

Board,

Regulation

Exception of
e

by

B^a7 bariL
statements.

B,

Opinions and Rulings
Ultimate responsibility in purchasing acceptis held to rest with Federal reserve banks.
The announcement that the Federal Reserve

ances

Board

will require statements satisfactory to it in
connection with acceptances is held to mean that
the statement shall be satisfactory in form.
(Informal Ruling, Page 13, January, 1916, Bulletin.)

MATURITY
Statutory Provisions

Any

Federal reserve bank

chase and

sell

.

.

.

may

.

cable transfers

.

.

pur-

and bank-

Responsibility
for

eli s ibiht y-

Statement form,

Commercial Banking Practice

122

er's

acceptances

ties

by

this

...

Act made

of the kinds

and maturi-

eligible for rediscount.

(Federal Reserve Act, Section 14.)

Regulations of Federal Reserve Board

To

be eligible for purchase, the bill must have a
maturity at time of purchase of not more than three
months, exclusive of days of grace.
(Regulations of Federal Reserve Board, Regulation B, Series
of 1917, IV.)

IS

Transactions in Bills of Exchange
and Trade Acceptances
DEFINITIONS
Regulations of Federal Reserve Board

A

of exchange, within the meaning of this
regulation, is defined as an unconditional order in
writing, addressed by one person to another, other
signed by the person giving it,
than a banker
requiring the person to whom it is addressed to pay,
in the United States, at a fixed or determinable
future time, a sum certain in dollars to the order of
bill

.

.

.

a specified person; and
trade acceptance is defined as a bill of exchange drawn by the seller on the purchaser of
goods sold, and accepted by such purchaser.

A

(Regulations

Federal

of

Reserve

Board,

Regulation

Bill of

exchange,

.

Trade acceptance,

B,

Series of 1917, III.)

ELIGIBLE BILLS AND TRADE

ACCEPTANCES
Statutory Provisions

Any

Federal reserve bank

may

.

.

.

purchase

Eligible bills,

the open market
bills of exchange
of the kinds and maturities by this Act made eligible
for rediscount.

and

sell in

.

.

.

(Federal Reserve Act, Section 14.)

Regulations of Federal Reserve Board

A

bill of exchange or acceptance to be eligible
purchase by Federal reserve banks under secfor

tion 14:

General conditions
°

e Igl

'

Ity *

Commercial Banking Practice

24

the drawee
Federal reserve bank unless
prior to purchase by a
it is accompanied and secured by shipping documents or by a warehouse, terminal, or other similar
receipt conveying security title
May be secured by the pledge of goods*
(2)
or collateral, provided it is otherwise eligible.
In addition to the above general requirements,
each bill of exchange and trade acceptance purchased under the terms of this regulation must also
conform to the more specific requirements set forth
under Regulation B, III (below)
(1)

Specific

conditions.

Must have been accepted by

(Regulations

of

Federal

Reserve

Board,

Regulation

B,

Series of 1917, II.)

Commercial
character.

be eligible for purchase, the bill must have
arisen out of an actual commercial transaction,
domestic or foreign that is, it must be a bill which
has been issued or drawn for agricultural, industrial,
or commercial purposes or the proceeds of which
have been used or are to be used for the purpose of
producing, purchasing, carrying, or marketing
goods in one or more of the steps of the process of
production, manufacture, or distribution. It must
have a maturity at time of purchase of not more
than ninety days, exclusive of days of grace.

To

;

Maturity.

(Regulations of Federal
Series of 1917, III.)

Reserve

Board,

Regulation

B,

Opinions and Rulings
See "Rediscount of Drafts and Trade Acceptances," pages 79-83, above.

used in this regulation the word "goods" shall be
to include goods, wares, merchandise, or agricultural
construed
products, including live stock.

*When

Open Market Transactions

125

INELIGIBLE BILLS AND TRADE

ACCEPTANCES
Regulations of Federal Reserve Board

A

of exchange or acceptance, to be eligible
for purchase by Federal reserve banks under section 14, must not have been issued for carrying or
trading in stocks, bonds, or other investment securities, except bonds and notes of the Government of
the United States and must not be a bill the proceeds of which have been used or are to be used for
permanent or fixed investments of any kind, such
as land, buildings, or machinery, or for investments
of a merely speculative character.
bill

Finance paper,

;

(Regulations

of

Federal

Reserve Board,

Regulation

B,

Series of 1917, II.)

Opinions and Rulings

An

instrument in the form of a bill of exchange,
drawn by an agent of a corporation upon the corporation itself, is not a bill of exchange such as is
eligible for purchase in the open market by Federal
reserve banks.

Draft drawn
1011

j£

^J™*

(Opinion of Counsel, Page 462, September, 1916, Bulletin.)

The

fact that a land

company has stamped

a

bill

a trade acceptance and has signed such statement as
"acceptor" does not in itself make it a trade acceptance. The bill was accepted by the bank and not
by the land company and is therefore not eligible
for purchase under the regulations which require a
bill to be accepted by the drawee.
(Informal Ruling, Page 112, March, 1916, Bulletin.)

For additional rulings, see, under "Rediscount of Drafts and
Trade Acceptances," pages 83-84, above.

^J J*"
no va iue.

de
haf

Commercial Banking Practice

EVIDENCE OF ELIGIBILITY AND REQUIREMENT OF STATEMENTS
Regulations of Federal Reserve Board

A
it

Federal reserve bank shall take such steps as

deems necessary

to satisfy itself as to the eligibil-

presents
prima facie evidence thereof or bears a stamp or
certificate affixed by the acceptor or drawer showing that it is a trade acceptance.
Unless indorsed by a member bank, a bill is not
eligible for purchase until a satisfactory statement
has been furnished of the financial condition of one
or more of the parties thereto.

ity of the bill offered for purchase, unless

(Regulations of Federal
Series of 1917, III.)

Reserve

it

Regulation

Board,

B,

Opinions and Rulings

The fact that a land company has stamped a bill
a trade acceptance and has signed such statement
as "acceptor" does not in itself make it a trade acceptance.
(Informal Ruling, Page 112, March, 1916, Bulletin.)

MATURITY
Statutory Provisions
Federal reserve bank may
bills of exchange of the
and sell

Any

.

.

ties

by

.

this

.

Act made

.

.

.

.

purchase
maturi-

.

eligible for rediscount.

(Federal Reserve Act, Section 14.)

Open Market Transactions

127

Regulations of Federal Reserve Board

To

be eligible for purchase, the bill must have
a maturity at time of purchase of not more
than 90 days, exclusive of days of grace.

...

(Regulations of Federal
Series of 1917, III.)

Reserve

Board,

Regulation

B,

For additional rulings see, under "Rediscount of Drafts and
Trade Acceptances," pages 85-86, above.

INDEX
PAGES
Acceptance agreements, duration of
Acceptance, bank, defined
Acceptance corporation, rediscount of acceptances of
Acceptance credits, syndicate
Acceptance defined
Acceptance house, rediscount of paper of
Acceptance policy of Federal Reserve Board:
General statement
Relative to syndicate acceptance credits
Acceptance, trade, defined
Acceptances, bank:
Based on domestic shipments of goods
Actual security, what constitutes
Actual transaction must be involved
Amount bank may accept
Bill of lading does not necessarily render draft eligible
Character, statutory provisions governing

13-15, 21-22, 36

118
103
14-15

9, 99,

9

103

9,

13-14
14-15
78-79, 123

33-37
24
34
23-25, 36-37
34
33
36
34

Duration of letters of credit
Eligibility not dependent on security alone
Maturity
34, 35-36
37
Purchase of bank's own acceptance
34-35
Release of shipping documents
Sale of goods not required to be involved
34
34
Shipment from principal to agent
Shipping documents in possession of bank's agent
33
Shipping documents must convey title
33
U. S. Revised Statutes, section 5202, limitations of, not applicable to
37
bank acceptances
16-28
Based on imports and exports
18
Acceptance at instance of exporter
19-20
Acceptance prior to purchase or sale
Acceptances in addition to loans
25
Actual security, what constitutes
24
23-28
Amount bank may accept
Bullion as goods
21
Coin as goods
21
Delay in shipment immaterial
19
Drafts accepted at instance of exporter
Drafts against collateral of acceptances
Drafts drawn under contracts independent of export transaction
Duration of acceptance credits
Exemption from ten per cent limit
Export contract not fulfilled
Foreign correspondents, acceptances by, under guarantee
Future importations of goods
General summary of limitations upon
Good faith a test in determining character
Goods defined
Guarantee, acceptances by foreign correspondents under
Identification of specific goods not required
Limitation on bank's liabilities, not applicable to acceptances
Limitation on loans to one borrower
See also U. S. Revised Statutes, section 5200
Loans up to ten per cent limit, acceptances in addition to

Maturity

18

20
17

21-22
23-24
19

27
19

28
16
21

27
16

27
24-25
25

21-22

'

•

PAGES
Acceptances,

bank—continued

.

Based on imports and exports— continued
Option in method of securing acceptances

*

•
Permission to accept not required.
surplus, application for
Permission to accept to amount of capital and
Proof of assurances as to character
Purchase of bank's own acceptances
dratt
Purchase of goods subsequent to acceptance ot
Renewal of acceptances
Sales to allied purchasing commission.
Secured bills exempt from ten per cent limit
Statutory provisions governing
Transaction must itself involve import or export
transaction, not sulTransactions independent of import or export
•

.

.

•

•

•

•

20

•

*»

•

•

ficient basis

•

•

•

18
*jj
i

•

^
^4,

m

Trust receipts as actual security
Ultimate export of goods, not sufficient basis
U S. Revised Statutes, section 5200, limitations of
limitations of
U. S. Revised Statutes, section 5202,
Executed to furnish dollar exchange
Amount bank may accept
Limitation on bank's liabilities
Maturity, statutory provisions governing
Permission to accept, application for
,••;•'
General statutory provisions
Investment in acceptances by member banks
Acceptances as commercial or business paper
Actually existing value, bills drawn against
documents
Bills discounted after removal of
acceptance
Bills discounted before or after
acceptances.
Bills of exchange include bank
or goods
Bills secured by shipping documents
Purchase or discount of acceptances
Reissuance of purchased acceptance
U. S. Revised Statutes, section 5200
•

•

*^
31-82
_

n-12
43-46

i

*"
^*
^
*

46
*o

•

* 5>

*£

••••• _
„
23~ 25 36 J7 **

Secured by warehouse receipts
Amount bank may accept
Bill of sale not eligible security
Control of warehouse by acceptor
Custodian of wool, receipts issued by

fi

'

'

3g41
'

41 _42
35-36, 42
35' 42

#

Release of warehouse receipts
Security not specified
Substitution of warehouse receipts
Sugar in bond, acceptances against

'

-

#

Warehouse

receipts:

Issued by independent warehouses
Issued by lessee
Statutory provisions
_
Syndicate acceptance credits
Board
See also Acceptance policy of Federal Reserve
•

•

•

•

Use of bank acceptances
Warehouse receipts, acceptances secured by
See also

^

39
4Q

Eligible security
Ineligible security

Maturity

™

**

Acceptances, bank, Secured by warehouse

42
42
4Q

^

38-39
39
11-12
"

1415

S«_42
receipts

PAGES
Acceptances, trade:
Definition of

9,

Must be accepted by drawee
Open market transactions in
See also Open market transactions,

78-79, 123

78
123-127
Bills of

exchange and trade accept-

ances

78
76-89

Place of payment of trade acceptance

Rediscount of
See also Rediscount

of, Drafts and trade acceptances
44-45, 87-89
Actually existing value, what constitutes
Advances by Federal reserve banks on promissory notes of member banks. .109-111

Collateral

County warrants not

eligible collateral

Farm loan bonds not eligible collateral
Indorsement of collateral
Maturity
Renewals of member banks' notes
General statutory provisions
Security for advances
Sunday or legal holiday, notes due on
Advertising space, trade acceptances based on

109-110
110
110
110

HI
Ill
109

109-110
Ill

82
90-95

Agricultural paper, rediscount of
See also Rediscount of, Agricultural paper
Assignment of open accounts, ineligible for rediscount

Bank acceptance defined
Bank acceptances, see Acceptances, bank
exchange, definition of
secured by
of sale, not eligible as security for bank acceptance

Bill of

Bill of lading, draft
Bill

Bills of

58
9, 99,

118

76-78, 123
34
41, 120

exchange

Drawn

against actually existing value

Include bank acceptances

Open market

87-89
44
123-127

transactions in
See also Open market transactions, Bills of exchange and trade acceptances
Payable elsewhere than in the United States, rediscount of
Presentment for acceptance

Rediscount of
See also Rediscount

of,

104
76
76-89

Drafts and trade acceptances

63

Broker's paper, discount of
Cattle paper, see Chattel mortgages
Chattel mortgages, as security for agricultural paper
Chattel mortgages, bank acceptances against
Collateral notes:
Eligibility for rediscount
Not eligible security for bank acceptances
See also Advances by Federal reserve banks, Collateral
Collateral trust notes, ineligible for rediscount.
Collection charges, bills payable with
Commercial or business paper, bank acceptances as

92
41, 104
57, 59-60,

63-64
41
64
64

44-45

Commodity paper:
Definition

open market purchase
Rediscount of, Commodity paper

Eligibility for

See also

Cotton mill paper, rediscount of

96-97
116, 117

66

PAGES

County warrants not

Demand
Demand,
Discount

eligible as collateral for

110

advances

67
70-77
24-25, 44-46

notes and drafts ineligible for rediscount
notice, and protest, waiver of
of acceptances

73,

See also Acceptances, bank, Investment in

33-35, 44

Documents, shipping
Dollar exchange

29-32

See also Acceptances, bank, Executed to furnish dollar exchange
33-37
Domestic shipments, bank acceptances based on
See also Acceptances, bank, Based on domestic shipments
23
Drafts accepted by foreign correspondents under guaranty
20
Drafts against collateral of acceptances
76-89, 123-127
Drafts and bills of exchange
See also Open market transactions, Bills of exchange, and Rediscount
of, Drafts and trade acceptances
34
Drafts secured by bill of lading
84
Drafts to finance capital requirements
,

Drawee

78

Export contract, acceptances against

19

63
60
79, 82, 83

Finance companies, rediscount of paper of
Food products, rediscount of paper secured by
Foreign transactions as basis for trade acceptances

21, 80, 103, 119, 124

Goods defined

HI

Holidays, legal, notes due on

Imports and

exports,

16-28

bank acceptances based on

See also Acceptances, bank, Based on imports and exports
Indorsement
Investment in bank acceptances by member banks
See also Acceptances, bank, Investment in

73, 74, 102, 106, 110

43-46

Letters of credit, duration of
Liberty bonds, loans on, may be exempted from ten per cent limit
•

Limitation on bank's

•

21-22, 36

43

liabilities:

Not
Not

applicable to acceptances
applicable to rediscounts with reserve banks
See also U. S. Revised Statutes, section 5202
Limitation on loans to one borrower
See also U. S. Revised Statutes, section 5200
Limitation on rediscount of paper of one maker or indorser

27, 32, 37

72-73
43
68-72, 87-89

00
57
25

Live stock defined

Loans to individuals, Federal reserve banks do not make
Loans to ten per cent limit, bank acceptances in addition to
Maturity, see under appropriate class of paper
Mortgages, see Chattel mortgages and Collateral notes

Non-member banks, rediscount for
Notes of member banks, advances by Federal

See also Advances by Federal reserve banks
Notes, promissory, not eligible for purchase in open market
Notes, promissory, rediscount of
See also Rediscount of, Notes, promissory

Open accounts

73-75
109-111

61,

reserve banks on

116-117
56-75
58, 81

PAGES

Open mar k e ^ transactio n^:^

"*•*—

l^an^cceptances.^lransactions in
Based on domestic shipments
Based on imports and exports
Drawn to furnish dollar exchange
Eligible bank acceptances
, Evidence of eligibility and requirement of statements
Ineligible bank acceptances
^r»

/

Maturity
Secured by goods sold
Secured by warehouse receipts
Unsecured acceptances
V Bills of exchange and trade acceptances, transactions
Bill of exchange defined
Conditions of

in

eligibility

Definitions

and trade acceptances
and requirement
bills and trade acceptances

Eligible bills

Evidence of
Ineligible

eligibility

Maturity

.

of statements

.

Commodity

paper, eligibility of
Notes, promissory, not eligible for

Place of

payment

of trade acceptance

Presentment of bills for acceptance
Purchase of bank acceptances by member banks
See also Acceptances, bank, Investment in
Purchase of bank acceptances by reserve banks
See also Open market transactions, Bank acceptances
Purchase of bank's own acceptance
Rediscount

118-122
119
118
119
118-120
121

120
121-122
119
119
120
123-127
123
123-124
123
123-124
126
125
126-127
117
116-117

78
76
44-46
24, 25,
118-122
24, 25,

45-46

of:

Agricultural paper
Amount rediscountable by a Federal reserve
Cattle dealers' notes
Cattle for breeding, grazing, or fattening
Cattle mortgages
Chattel mortgages

Conditions of

Dairy

bank

eligibility

cattle, notes for

Dealers, notes of
Definition of agricultural paper
Discount may be by either maker or indorser
Eligible agricultural paper
Farm tractors, notes for
Farmers' notes
Fertilizer, notes for

90-95
94-95
90
93
92
92
91
92
90
90-91
93

Livestock paper

91-94
93
93
92
90

Packing company, note of
Statutory provisions governing agricultural paper

49, 91

Bank acceptances
Acceptance corporation, acceptances of
Bills payable outside United States
Chattel mortgages not eligible security
Definition of bank acceptance
Differential rate for

member bank

acceptances

Drafts not payable at reserve banks

91

99-106
103
104
104

99-100
103
102

PAGES
Rediscount

of

— continued

Bank acceptances— continued
Eligible acceptors
Eligible bank acceptances
Evidence of eligibility

g9
Qg

™°
^ -^

iru-in*;

Indorsement
Ineligible

~_,

'

'

bank acceptances

Maturity

1Q5
99-100

•

Negotiability, conditions of
Payment at Federal reserve

.

bank

J Q5

Renewals, rediscount of
Warehouse receipts of independent warehouses
Commodity paper
Conditions of eligibility
',''•'
Defined
j
Direct discount for firms not authorized
Eligible commodity paper

„

•

Special rate, suspension of
Staples defined
Drafts and trade acceptances

Acceptance by drawee

^J^
g7

96-97
98
»°
9g
96
7 g_g9
7g
«7-«q
°'

'

™

_

Actually existing value, what constitutes
Advertising space, acceptances based on
Amount rediscountable for one bank

7Q-79
gg
79-83

Definitions
Demand drafts ineligible
Eligible drafts and trade acceptances

Evidence of eligibility
Extension of time

^_° 5

7g g6
q' go
7

'

•

Foreign shipments, acceptances based on
Future purchases, acceptances based on

>

^ g9
83-84

Indorsement of member banks

and trade acceptances

Ineligible drafts

°£_°

Maturity

'

Negotiability of drafts and trade acceptances.
Open accounts, acceptances used in liquidation ol
Qualified acceptances

Rediscount for non-member banks
on
Retail transactions, trade acceptances based
Stamp "trade acceptance" has no value
Notes, promissory
Agricultural paper
Amount rediscountable for one member bank
.

•

•

•

Commercial paper
Commodity paper
Definition
ineligible

Eligible classes of notes

Evidence of eligibility and requirement of statements
Farmers' notes
Fixed investments, notes for, not eligible
Indorsement of member banks
Ineligible classes of notes

purchase of
Liberty bonds, notes to replace funds for

Maturity

"

gg
73-75 89
lo
*

'

56-75
56

•

Collateral notes

Demand ,'notes

6

77.70
'°

fiS-73

59--6O 64
56*

57
^g
56
g7
56-61
«*_««
w>
'

™
„^

^
62-64

^^

—

pages
Rediscount of continued
Notes, promissory continued
Non-member banks
61, 74
Paper acquired from or indorsed by
73-75
Rediscount for
63
Note of acceptance house or broker
58
Notes based on production and distribution of goods
58
Open accounts, assignment of
72
Rediscounted paper not limited by U. S. Revised Statutes, section 5202
58, 62
Renewalnotes
59-61
Secured notes
69, 72
State member banks, rediscounts by
65-66
Statements, requirement and interpretation of
56-57, 60-61
U. S. obligations, notes based on or secured by
57, 60-61
War Finance Corporation bonds, notes secured by
Trade acceptances, see Drafts and Trade acceptances
49-106
Rediscounts with Federal reserve banks
53-55
General regulations governing
49-52
General statutory provisions
46
Reissuance of acceptances
35
Release of shipping documents and warehouse receipts
22
Renewal of bank acceptances
HI
Renewal of member banks' notes for advances
80
Retail transactions as basis for trade acceptances

—

:

Security, actual,

.

.

what constitutes

Security eligible for acceptances
Single name paper ineligible for purchase
Staples defined
State member banks, rediscounts for
Statements, requirement of
Substitution of warehouse receipts
Sunday or legal holiday, notes due on

24
38-41
116-117
96
69, 72
^
05-66, 121, 126
42
^

in

open market

HI
14-15

Syndicate acceptance credits
See also Acceptances, bank, Syndicate acceptance credits

76-89, 123-127

Trade acceptances
See also Acceptances, trade
Transactions, acceptances must be based on actual
Trust receipts as actual security

not basis for commodity paper
member banks' notes
S. obligations, rediscount of paper secured by
S. Revised Statutes, section 5200 (ten per cent limit on loans)
S. Revised Statutes, section 5202 (limit on liabilities of bank)
Use of bank acceptances

U.
U.
U.
U.
U.

S.

Government,

sales to,

S. obligations eligible collateral for

Warehouse

97
109-110
56, 60-61
24-25, 43-46, 71
27, 32, 37,

72-73
9

receipts

secured by
See also Acceptances, bank, Secured by warehouse receipts
Release of
'"
Substitution of
War Finance Corporation bonds:
Advances on member banks' notes secured by
Rediscount of paper secured by
War savings stamps, paper secured by, ineligible for rediscount

Bank acceptances

I

34
24

38-42
^5
42
109
57, 60-61, 80

63

Bank

National

Commerce
New York

in

of

ORGANIZED

1839

President

James

S. Alexander

Vice-Presidents

John E. Rovensky

R. G. Hutchins, Jr.

Herbert P. Howell
J. Howard Ardrey
Stevenson E. Ward

Faris R. Russell

Guy Emerson
Louis A. Keidel
Cashier

Richard

W. Saunders

Assistant Cashiers

A. J.

Oxenham
M. St. John

Everett E. Risley

William

Maxwell
John J. Keenan
Gaston L. Ghegan

A. F.

H. P. Barrand
H. W. Schrader
R. E. Stack
L. P. Christenson
E. A. Schroeder

A. F. Broderick

R. H. Passmore

Statement of Condition
November

1,

1918

RESOURCES
Loans and Discounts
$307,609,266.34
Overdrafts, secured and unsecured
34,717.82
U. S. Certificates of Indebtedness and Liberty Bonds 96,560,090.37
Other Bonds and Securities
10,034,212.13
Stock of Federal Reserve Bank
1,200,000,00
U. S. and Other Bonds Borrowed
24,689,450.00
Bonds Loaned
50,000.00
Banking House
2,000,000.00
Due from Banks and Bankers
5,041,141.05
Checks and other cash items _
3,262,846.30
Exchanges for Clearing House
49,315,517.36
Cash in Vault and Net Amount Due from Fed. Res. Bank
46,487,833.87
Interest Accrued
1,464,253.05
Customers^ Obligations a/c Bank's Contingent Liability
1,440,000.00
Customers' Liability under Letters of Credit and Acceptances 42,210,499.09

-------------___.
----------_-__

$591399,827.38

------_-------------------LIABILITIES

Capital Stock paid in

Surplus Fund

Undivided Profits, less expenses and taxes paid
Reserved for Taxes, etc.
Dividends unpaid Letters of Credit

-

Acceptances executed for Customers
Deposits
and Other Bonds Borrowed
U. SUnearned Discount
Bills Payable with the Federal Reserve Bank
Liabilities other than those above stated
-

-

-

-

-

-------

-

-

-

$25,000,000.00
15,000,000.00
9,376,660.45
3,096,833-25
17,525.00
10,098,242.26
32,591,498.60
379,835,997.64
24,689,450.00
1,726,110.99
88,000,000.00
1,967,509.19

$591,399,827.38

387333
-»

*

i

.

UNIVERSITY OF CALIFORNIA LIBRARY