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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis RENCE BOARD OF GOVERNORS ANi YERAL R E S E R V E BANKS. January 2 0 , 1915. WALT SHORt Ti IW https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Kains: C h e c k words, Mr. Rhoades: Mr. Kains: o r numbers? C h e e k words. F o r amounte o f money? The Chairman: o f course a code c a n b e made f o r a check of any payment. Is the suggestion i n such form that i t e a n b e embodied in the record? (Mr. Rhoades handed a paper to the Chairman.) The Chairman: Of course, T h a t i s what i s known a s a free system. f o r domestice u s e i t m a y n o t b e necessary t o apply t h e same safecuards t h a t w e apply t e foreign cable messages, b u t t h e k e y that w e used ordinarily i n New York for a control word i s built u p b y 2 systom that i s very simple t o operate. T t varies w i t h every cable, a n d i t i s impossible f o r anyone t o unravel # t unless t h e y have t h e key, a n d i t i s a great deal safer than this system, Mrs Aiken: T h e m a n who made that u p did not knew anything about codes. The Chairman: I f i t i s entirely agreeable t o the meeting, I will get some sugcestions o f keys and have them sent under seal to the Governors, o r send them to yous Mr. Rhoades: § You might a s well send them right around > The Chairman: T h e y e a n b e printed, a n d each bank can adopt i t s o w n system? Mr. Pancher: I n s t e a d o f using t h e first w o r d o f the Ag B, A , Code, using this k e y word? The Chairman: U s e @ separate k e y a s a n additional precaution. Mr. Kains: A r e t h e keys y o u have i n mind numbers o f letters? The Chairmant something like this: T h e best k e y that I have seen worked S u p p o s e y o u take the second letter of the first word a n d the second letter o f the second word, and then y o u have t h e numbers o f the day, m o n t h a n d year and then y o u take t h e digits o f the amount, a n d those, added tegether, g i v e y o u a number, w h i c h i s the key, a n d the words with whith your cable opéns, a n d the date e n which y o u s e n d i t and the a m u n t involved 421i have t o prove b y this keys U n i e s s t h e k e y proves o n the other end, of course t h e message i s disregarded, Y o u just reverse t h e precess a n d find out what t h e message i s b y that method. i will have o n e o f those sent t o you, Governor Rhoades, if I may. A motion i s made a n d seconded, I understand, t h a t n o Supplemental code b e prepared a n d adopted a t the present time, but that the A, B. A, Code b e used with a key for a test o r check word. I s there any further discussion? (There being n o further discussion, t h e question w a s put and carried.) The Secretary: T h e Board sugzests that w e take u p 12, 13, 14, 15, 1 6 and 240 Mr, MoCord: M r . Chairman; I have a United States Senator o n m y paak i n Connection w i t h this definition of commercial paper, acceptable, eligible paper, a n d I think that this letter f r o m Governor Hamlin t e m e might b e inter https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (esting to this body, and Iwill read it if it is agreeable, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I wili first state the case, T h e Bank of Ocalla, Florida, brought o n some commercial paper a n d wanted t o know what paper w e would takes W e went over it, a n d said, "We will take this; w e will t a k e this; w e eannet take that®, and s o forth. M e eaid, " Y e have a phosphorus mine that T want t o help t o keep their p a y roll ecing, a n d w e want t o get this paper discounteds* I said, "Does t h e statement show liquid assets, sufficient a s they stand t o diseount?* He said, "No, b u t t h e product o f the mine i s commercial, and I want t o have this discounted f o r the sake o f the pay- rolis.* I said, "All right. that product sola?" H N o w , tell me; has he had e said, *No.* I Sligible f o r this reason? said, " I t i s not T h e y d i g phosphate o u t o f the ground a n d put i t i n bins i n sheds, a n d they have n o market. T h e phosphate i s used i n Germany t o a great extentm but o f course Germany has noboats going now, a n d neutral vessels cannot take ity I do not know how lone i t will be tied Up; a n d for that reason I will n o t b e able t o dis+ count it, unless you can give m e your assurance that the assets will take care o f these things regardless o f whether it i s tied u p o r not?" So h e went back home a n d studied about it, a n d h e said that the Governor of the bank said he/would not take phosphate under any conditionss T h i s fellow sat down and wrote @ United States Senator, and the Sneator comes over here with @ letter t o the Board, a n d they write me, and I come back a n d explain t h e situation. Here i s the answer tha$ I got after I made the explana- tion. I think itmight b e interesting t o you. The Chairman: V e r y . Mr. MeCord: (Reading: ) } PEDERAL RESERVE BOARD, WASHINGTON. January 13, 1915. Mrs Jos, A . MeCord, Governor, Federal R e s e r v e Bank, Atianta, G a , SI Ri« Your letter o f January second concerning t h e corres~ pondence between Mr, R. C. Camp o f the Florida Power Company of Ocala, Fla,, a n d Hen, Wathen P . Bryan, Senator from Florida, h a s been received a n d considered b y the Federal Reserve Boards The Beard h a s n o disposition whatever t o pass upen your action i n this matter, recognizing that t h e question o f the wisdom o r unwisdom of,any given l o a n i s above 4 1 1 things a matter that e n t b e determined locally and which cannct possibly beeven tentatively settled here except i n extra- ordinary eases, T t would not undertake, therefore, to enter upon t h e question. whether o r not you-were right i n refusing -upom its business merits, t o undertake transactions like _those referred to, and from the facts which are now before it, is disposed t o feel that y o u were entirely wise i n your posi- tions There a r e certain things; however; i n your letter which lead the Board t o note that i t dees not feel entirely in accord with you i n the views o f the powers granted b y the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Reserve A c t that y o u have apparently accepted, You say, ‘ I t was therefore apparent t e m e that a n y phesphate mined, washed, screened a n d put i n bins under sheds, ) Would b e purely a n investment o r a speculative matter, depen- dent upon a future market, f o r which a t that time they aiw net have orders t o covers! I f a n electric machinery con- cern produced motors for which i n general there i s a fairly consistent demand, b u t finds that owing t o certain unfbreseen events t h i s d e m a n d subsides, t h e carrying o f such product should not b e excluded a s a speevlation o r a s a n investment. Copper p r o d u c e d a n d e a r r i e d by @ mine w o u l d n o t b e c o n s i d e r e d a mere investment n o r a speculation, it h a d b e c o m e n e c e s s a r y i s o e i f for similar reasons t e Carrya s t o c k of the finished o r half finished product. I f firme unconnected w i t h either t h e production o r distribution of such product would acquire t h e same a n d carry it, i t would be &@ speculative investment. This arguement holds good; also, i n the case w o which y o u refer o f the brick manufacturer a t Macon Georgia, O principle, t h e s e transactions a r e not t o b e barred. n T h e y * must, o f course; b e earefully serutinized a s business | Propeositionss I f the manufacturer i s loading u p & larger amount o f his product than i s conservative for him to carry, and i f the banker h a s well founded apprehensions that t h e manufacturer i s getting into a dangerous business position because t h e ultimate sale o f the manufactured product does not appear certain, t h i s i s a s good a reason f o r paper refusing that paper a s any other that m a y not https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 164 appear sound. I t i s not necessary that there must b e a de- finite order i n sight which would guarantee t h e sale o f the goods within ninety days. I f , o n the other hand, t h e r e were apparently clear evidence that t h e goods could h e t b e sold within ninety days, m o s t careful scrutiny would b e advisable. A great m a n y processes o f production take more than ninety days. W h i l e a Federal Reserve Bank must n o t make loans, except o n agricultural products, h a v i n g a longer time t o r u n than ninety days, i t i s not t o b e held that paper many only be purchased which i s based upon transactions which liquidate within that time. I t ought eventually t o be safe liquida- ting a n d the customer must understand that h e must n o t u e further i n his operations t h a n h e i s safely pretected b y his borrewing capacity, a n d the member bank i n turn must b e fully aware that there i s n o guarantee o n the part o f the Federal Reserve B a n k t o renew a n y paper when i t matures, On the other hand, i t will b e impossible t o rule out all paper which m a y possibly, maturity. o r i s even likely t o b e renewed a t P u l l emphasis must b e laid o n the fact that the underlying transaction i s one o f Khe legitimate commercial, agricultural, o r industrial character, a n d that the credit of. the member bank standing i n between i s a good one, a n d that berrowing, hoth on the part of the customer with the member bank and o f the member bank with the Federal Reserve bank, a r e Withinsafe bounds, Respectfully, C.S&S. Hamlin, G o v e r n o r . H, Barker Willis, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Secretary." The Chairman: I think i f you will g o through t h e pro- posed circular No. 3 , serie o f 1915 «-Mr. MeCord: I beg your pardon, M r . Chairman, f o r bzinging t h i s in. The Chairman: I think i t bears o n this matter s o direct- iy, Governor MeCord, t h a t i t will throw light o n this very transaction. Suppose w e defer the discussion o f these particular matters until after w e have considered this regulation, a s they have bearing u p o n what w e are going t o consider. I a it your pleasure t o have this cirevlar read? Mr. Yold: I not? think w e have already read it, have w e M o s t o f u s have read i t i n advance. Mr. O . Yells: I would suggest, M r . Chairman, t h a t objections t o any part o f it b e brought out now. Mr. Wold: I e it intended that this Circular No. 3 go te the member banks? The Chairman: Y e a . Mr. Wold: s t o the next t o the last paragraph, I A Shoudlthink i t would b e unnecessary t o have i t g o i n there. It would b e well t o eut i t outa The Chairman: paper, I understand, T h i s will b e treated a s one piece o f i n two cases; t h e circular appearing o n the first page, a n d the second and thord pages being the « inside of the folding circular. T h i s consolidates a number of circulars into one operation. Mr. Wold: T h e next t o the last paragraph there: It seems t o m e i f there i s a n y latitude given i t would b e f o r https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 166 the officers o f the b a n k , i n dealing w i t h the member bank, and not p u t i t onto t h e member banks themselves. (Reading: ) "While i t hae been thought b e s t n o t t o insist, a s a mandadé tery requirement, upon a written statement i n case o f limited borrowings b y the depositors” -<« The Chairman? I t i s your view, Governor Wold, o r rather strong suggestéon, t h a t credit information b e compiled as t o customers w h o borrow small amounts? T h a t form of suggestion might gust a s well b e omitted a n d the subject ieft open t o t h e discretion o f the member banks? Mr, Wolds I think so. T h a t has a bearing upon page 4, too, where it is limited te $5,000 which reegen sent to fifty thousand dollar banks? Mr. MoCord: I n reference t o that paragraph that Govere . | mor Y o l d i s speaking of, that h a s caused a great deal o f dissatisfaction ---I mean t h e original rule No. 13-<-- i n our district, I t has eaused more dissatisfaction than the question o f exchange o r anything else. I found that out; and there i s where, Gevernor Seay, m y hypnotism, | it, comes in. I a s you cali want t o get something d o n w d o w n t o Atianta _and went over this proposition and told them they did not : have to swear to-this, that or the other, and did net have to dot every “i" a n d cross every " t * a n d s o on. I Would b e well t o let this paragraph stay in. think i t I t shows a more liberal spirit o h the part of the beard than the former eircular. I t certainly dees not have any bad effect o n our member banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis O n e t h e other hand, I believe t h e y would b e 167 free t o use w i t h u s a lot o f smaller paper which would b e & very satisfactory paper f o r discount b y Federal peserve Banks, be@ause y o u rarely lose money o n ‘these papers i n a wikueuumk. country bank. Mr. Wold: A note i s @mall o r large, relatively. A note of $5,000 may be small i f offered i n a million delilar bank, a n d i t might b e large i f offered i n a muck smaller bank. : This circular would indicate t o the member banks that for any note o f $5,000 o r under h e i s not obliged t o file a statement. . H e certifies that i t i s eligible, a n d i t seems te m e that w e wiihe wisaindee f r o m investigating o r questioning whether o r not i t was, I cannot s e e a n y reason why a fifty thousand dollar bank 6ffering a loan of ten per cent o f its capital eught not t o furnish s statement o f the a f f a i r s o f t h e m a k e r o f t h e paper, a s well a s t h e b a n k of $500,000 offering a piece of paper of $50,000. U n d e r this c i r o u l a r t h e b a n k e r c o m e s a n d g a y e “ Y o u c a n n o t a s k any questions: Y e have eertified it, and that meets the requirement o f the Federal Reserve Aet, a n d that i s all there i s te it. Y o u cannot g o back o n that.” This attitude can be used b y the managers o f the bank, but w e d o not want t o let the member bank believe thatwe are precluded f r o m making o u r o w n investigation a n d satiefy- ing ourselves a s to whether the paper i s admissible o r nots The Chairman: D e o I understand your point, Governor Yold, t o b e that i t i s practically a n invitation t o member banks t o put themselves i n e position where t h e y c a n resist https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis reasonable requests f o r information about t h e paper o f sm@lier denomination? lr. Wolds T h a t i s the w a y I read it. T h a t is, t h e circular as a wholes Wr, Kains: I a m i n hearty agreement w i t h Governor Wold regarding that, I think the first two conditions are @ll right, but leave the rest t o the governors e f the various banks, Mr. MeCord: | You would eliminate this section o n the first page? Mr, Keins: Mr, Pancher: Mx. MeCorsmt: I T would eliminate that whole No. 3. Y o u a r e o n the second page. H o w about t h e first page? Mr. Void: I was just calling p a g e three t o your a t e tention i n connection w i t h t h e last paragraph o n page 1. They g o together, practically, other st E a c h h a s a bearing o n the I n other words, t h e y are applying t h e rules t o the small banks, but are teliing the big banks that they have got t o come hiteeus i i s titgensh lens T h e small banks c a n make their word good o n the application. Mr, MoDougal:..._ _ It i s not m y understanding that. you, a s | benkers, will b e denied the right o f investigation. T t _have thought i t would be a very good thing to put i n there, at least temporarily. I t will help t o popularize the sys- tem i n the district, particularly among t h e small banks where w e have not b e e n accustomed t o ask then f o r state- ments, where they are doing business with men i n thenaighborhood w h o m they have known f o r a long time a n d they d o not https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 169 feel diapesed t o ask them for a statement whenever they want t o borrow $500 o r $1000, I f this ciroular, however, is t o deny t h e right o f the officers o f the banks t o make a n investigation s k e h a s they see fit, t h e n I would b e opposed to it; but I do not think i t i s s o intended. Mrs Seays T h i s circular was under consideration yes- terday b y the Advisory Counsil, a n d they applied t h e prune ing knife very f r e e l y < « T h e dominant sentimant, a n d t h e emphatic sentiment, was that i f the Pederal Reserve Board Would make determinations a s to what commercial paper was--Which they d o o n the second page o f this citeular <-«- that very much o f what was left might b e and should b e left t e the Federal Reserve Banks I f you take u p the circular a s you propose, and go through it, if desired, I can point out what was eliminated b y the Council. The Chairman: I Mr. Wold: have that marked, @lso. T h a t i s m y position, t h a t there ought t e be more latitude left t o t h e officers o f the banks, a n d mot put i t all u p to the member banks The Chairman: M e y w e not have @ dispussion o n just what the Advisory Council have said, f o r our guidance? Mr: Aiken: B e f o r e w e take u p i n detail the circular, I would Xie like te say that i t seems t o me the last paragraph en the front page could b e well omitted. I do net think that i t adds anything t o the strength o f the circular, a n d it seems t o m e that i t sugcests t o possibility o f more ridgid requirements being p u t inte effect I must s a y that I cannot agree that banking prudence requires that wherever https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4.70 possible t h e observance o f the rules originally prescribed may b e encouraged. I know o f n o banker --~- and I know a great m a n y different o n e s --<« who would ever think o f exacting a n y such requirements a s that i n the eriginal cir- Sular. i saw the proof which was sent t o us of this cireu- iar, and @ number o f men i n the larger banks i n Besten took exeeption t o that. I think they 811 agreed = that a bank eredit department could b e run eminently pruiiently without any such skigk rigid restrictions a s sugcested. The Chairman: T h e s e suggestions i n regard t o the Circular, a n d , in fact, both the cireuvlar and the reevlations can be disposed o f more promptly i f they are put i n the form of a m o t i o n t h a t w e can act o n e Mr. MeCord: I move that w e take i t u p paragraph b y paragraph, The Chairman: A r e there a n y sug¢estions i n regard t o the first paragraph o f the cireular? There s e e m t o b e n o sugzestions. How about the second paragraph? Mr. MeCord: G o v e r n o r Aiken, thatfirst paragraph there has some question about the extension o f time for pute ting into effect t h e original order. V o u l d n o t that a f - fect just a s well --«- Mr, Seay: i f the provisions o f the cireular proper are materially altered, t h e letter accompanying i t will heave https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to be revised t o some extent, I think. Mr. Vold: T h e next t o the last paragraph i s all right to g o t o the officer o f the bank, b u t not t h e member bank. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis That i s a place t o differentiate. Wr. Seay: I say, i t may have t o be revised. The Chairman: I think w e ought t o make quite certain that w e are not confusing s o m e o f these regulations. cular No. 3 C i r - supersedes Circular No. 13. C o n s e q u e n t l y , Circular Ne.13 e a n b e eliminated f r o m consideration e n tirely. W e are speaking o f the cidcular a n d not o f the requiation. Mr. MeCord: M r , Chairman, j u s t o n e point o n that. I do not want t o prolong that discussion, b u t here i s a n unfortuante situation. every abnker. C i r c u l a r 1 3 has been i n the hands o f I t has been studied elosely. it fixed i n their craniums. T h e y have g o t T h e s e people have i n seme w a y or another t o eliminate s o m e o f that, o r w e will have trouble in bringing some o f them back into the folds The Chairman: W e are doing that b y withdrawing Cireu- iar No. 1 3 and substituting Cireular No. 3 of 1915. T h a t i s the circular thatwe a r e considering, thataeccompany that circulars a n d the regulations T h i s regulation (B) super- cedes Nos. 2 and 4, and Cirevlar No. 3 has been extended i n its operation until July 15, s o that until that date the Simpl@ statement on the application for discount of the applying bank is @11 that need be required as to any papers To s t a t e t h e s i t u a t i o n a s w e a r e c o n s i d e r i n g i t , i t is this. I f Circular No. 3 and the Regulation (B) which accompanies i t take effect, w e have eliminated f r o m consider- ation a t i r e l y Circular No. 13, a n d regulations 2 and 4, and w e make a fresh start w i t h only regulation No. 3 in effect until J u l y 15, which permits t h e acceptance o f the Simple statement o f the applying bank. Consequently, w h a t w e are n o w considering i s a cirsix months cular and regulation to be issued/in advance of i t s taking effect; a n d that policy eof giving s i x months notice of a change I think w e c a n afford t o endorse a s a n excellent principle t o apply t o a n y important matter o f this sert. Now o u r quéstion is, Shall w e Himsa’ modifications i n Circular No. 3 , issued a s o f January 15th, t o take effect July 15, next, and if so what modifications shall b e sugzested am to the Reserve Board? I understand that Governor Me- Cord feels that the first paragraph o f Cirevlar N o 3 might leave t h e impression that there i s some remnant o f Cireular No. i S left i n operation. D e you sugzest that, Governor MeCord? Mr. MeCord: N o ; I understand why, a n d therefore I The Chairman: I have n o t raised y o u out, h a v e I ? (Laughter). Then,I u n d e r s t a n d , the first paragraph. t h e r e i s n o avuestien i n r e g a r d t o H o w about t h e second paragraph? There seems t o be no question a s t o that paragraph, Now about t h e third paragraph? Should i t s o happen, Mr. Chairman, t h a t this body conmeurred i n the recommendations m a d e b y the Federal waixak Advisory Council, t h i s would have t o b e quite materially redraéfted? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Chairman: Y o u l d not w e have t o condiser that, 173 Governor Seay, after w e have considered t h e third paragraph of the regulation itself, w i t h reference t e the m d i f i c a tions i n the circular which would b e necessary t o conform t o the modifications i n the regulation? Mr. MoCord: T h e n I move you, Mr. Chairman, t h a t w e pass t h e third paragraph until after t h e other considerations, a n d then come back t o it, The Chairman: Y e n o w come t e t h e fourth paragraph, I will n o t put t h e motion o n these paragraphs unless t h e question i s asked. G o v e r n o r Wold, y o u h a d some suggestion in r e g a r d t o that. Mr. Yold: M y thought was, Mr. Chairman, t h a t i t should b e eliminated altogether f r o m the circular that went to the member banks. I t i s well enough t o mut i t u p t o the manager o f the bank a n d lethim know h o w the Fedegal Reserve Board regards it. I think t i ought t e remain where i t i s until w e h a v e c o n s i d e r e d t h e RERSRgARIS a n d requirements we of the regulations, a n d then see what hearing i t has. The Chairman: Y e s . T h e n y o u a r e Willing t o pass paragraph 4 for the moment? Mr. Yold: Y e s . The Chairman: N O w w e will take pafagraph 6 , Governor Seay, h a v e y o u a suggestion i n regard t o that paragraph? Mr. Aiken: I move, Mr. Chairman, t h a t w e pass all that at this time. The Chairman: V o u l d y o u make amotion regarding your recommendation, Governor Aiken, because this last paragraph https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis has n o direct bearing o n the régulations w e are going t o consider. Mr. Aiken: I move that t h e last; paragraph b e omitted} The Chairman: I MeCord: I s that motion seconded? second it. Chairman: I s there a n y discussion o n Governor Aiken's motion i n regard t o the striking o u t o f the fifth paragraph o f C i r e v l a r N o « 3 ? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis remarks, I I f there a r e n o further will p u t t h e m o t i o n (The motion was thereupon put and carried.) The Secretary: I would suggest, M r . Chairman, t h a t be phrased, " b e recommended t o t h e Federal neserve Board." The Chairman: N o w w e come t o t h e regulation. I s there a n y comment a s t o that preamble? Mry Wolds I whole. move that they b e congratulated u p o n t h e I t i s gotten u p very clearly. Mr. Seay: Y e s . The Chairman: preamble. I t i s very admirable, I think, T h e r e seems t o b e n o criticism o f the H o w a b o u t t h e f i r s t pararzraph? Mr. Kains: v e r y goods I move i t b e approved; also, Noe 2. Mx. Wold: A n d the method o f certifying eligibility. All that first Bage i s all right. Mr. McCord: D o y o u Want a n y more definite definition as t o m o n e y - - - “ t h e p r o c e e d s e f which have been used o r are to b e used"? Nir. Seay: T h e y have altered that phraseolocy very considerably, a n d I think i t i s much more near t o t h e requirement n o w than i t ever has been. The Chairman: I think w e ought t e bear i n mind i n connection with this regulation particularly, a s n e as the circular, t h a t t h e first regulation a n d cirevlar i s e sued b y the Federal Reserve Board o n the subject o f comnercial paper covered eight printed pages, m o r e o r less, a n d t h e members o f the Federal Reserve Board have waked u p t o the fact that there w a s t o o much material there f e r the member banks t o read and digest and examine, a n d their effort o n this regulation B has been t o reduce i t t o a yery small statement o f principles i n the fewest number o f words. I am afraid that this regulation a s t o t h e statement o f prine ciples could n o t b e improved b y adding language t o it. Mr. Seay: Mr. ¥Yolid: Yr. Seay: I t i s admirable, now, a s it is, I t i s the last w o r d o n the subject, T h i s circular w a s referred t o 2 committee for c o n s i d e r a t i o n a n d r e c o m m e n d a t i o n b a c k t o t h e Couneil. There w a s one thing w e added t o Article A of Section 2 , i n which two o f us concurred and the other members did not concur, b u t acquiesced finelly. ever, w h e n i t got t o the Council. I t was eliminated, hovwV i t h your permission I Will r e a d what that was, The Chairman: Certainly. Mr. Seay: ( R e a d i n g : ) "Seetion 2, Article A, T h a t i t must b e a bili the proceeds o f which have been used o r are t e be used i n producing, burchasing, carrying o r marketing 'goods' i n one o r more o f the steps i n the process o f production, manufatture and dis¢ribution.® https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 176 Then the Comittee o f which I spoke added, "the ’ reasonable expectation o f being liquidated a t maturity.® The Chairaant T h e Word "reasonable", i t seems t o m e i s a very dangerous qualification t 6 put in. Mr. S e a y s " W i t h t h e e x p e c t a t i o n o f b s i n s Xikuuskad l i g - 4 : ufatea a t maturity." & T h e word “reasonable” was i n there. Mr. Yold: T h e bill itacif promises toe pay. Mr. Seay: T h a t w a s t h e attitude t a k e n b y the Council. Mr, Aiken: I t seems t o m e that that letter that Governor MeCord presented makes unnecessary a statement t h a t the bill should b e necessarily p aid a t i t e maturity - - it. should n o t b e renewed. The Chairman: W e have t o bear i n mind, I think, t h a t from the standpoint o f the Federal Reserve Banks w e are discounting a plece o f paper u m kk which i s being rediscounted} and i f there i s n o evidence o n the face o f the paper that the maker o f that note has a right o f renewal, t h e prima facie evidence o n the face o f the note i s all t o that e f fect, that i t will b e paid a t maturity. Reserve Act intended, I T h i s Federal think,» t o preclude the possibility of any arrancgemént f o r renevals o n paper, a n d then went | inte a definiiion o f what kind o f paper would b e eligible for rediscount, providing t h a t there w a s n o question about it. being a n obligation t o p a y a t maturity. We had at one time a suggestion under consideration in Slmost identieall¢y t h e language that Gevernor Seay h a s suggested. T h e question is, does i t add definiteness t o statement o f principles rathen than t o a s t a t e m e n tfo https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis _& precedure t o b e followed. Mr. Yold: A l s o , i t oceurs t o m e that i t i s like taking & man's n o t e o r p r o m i s e t o pay a thousand d o l l a r s in ninety days,:and then taking his verbal word that h e will pay it. (Laughter) Ur. Seay: I merely mentioned that a s a sidelight; and what you say, Governor Yold, i s practically what the Council concluded o n the matter. I may b e convinced, a n d I think Governor McCord m a y b e convinced, t h a t i t would i m e prove t h e character o f the paper offered t o us. W e know that the paper w h i c h s i offered t o us, a n d upén which they make declaration that i t is eligible paper, i s such paper as i s not contemplated t o b e paid a t maturity. t h e Ctrmarks a b o u t i t a n d t h e e x p e r i e n c e w e h a v e h a d w o u l d s u r e gest that t o us. V e know i t t o b e a fast. Mr. MeCord: T h e addition o f that word would de- preciate t h e value o f the papers Mr. O. Felis: T h a t depends entirely upon t h e extent to which you are governed s t the time o f taking the paper. I may be asked t o take paper and thereby create a line o f eredit which I shall expect t o maintain until next fall. This should b e a common sense application o f taking lines of erédit. fr. Seay: I t i s fortunate that 4 1 1 t h e reserve banks d o not d o it. W e recognize that, a n d I therefore pass i t over; b u t i f w e a l l h a d o u r a s s e t s i n there t h e y Would not b e liquid assets. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. 0 . Velis: B u t a certain a m o u n t o f assets o u c h t t o go imto that paper i f we are going t o d o the amount o f good that w e must do. The Chairman: W o definite suggestion i s offered b y way o f a n @mendment t o t h e paragraph o n the first p a g e o f the regulation. Mr. Rhoades: W o u l d i t b e i n order t o take t h e recom- mendations o f the Advisory Council o n this last page a n d have them read? The Chairman: I have that marked, Gevernor Rhoades, if i t i s desired t o consider their recommendation first, I can d o that, o r you m a y consider i t after y o u have arrived at conclusions without regard t o their section. ir. MeDougal: I move that i n A-1 t h e words commene- ing with “contains a statement o n its face that i s was issued for goods actually purchased o r sold,” b e eliminated, Mr. Aiken: I second t h e motion. Mr. Wold: I move that section B h be eliminated, what is the need o f the first clause? The Chairmen: Mr. Aiken: I Mr. MeDougai: view t o making t y I s the motion seconded? second t h e metion. T h e motion i s t o eliminate A-l with a e o t o put a n y statement o n the face o f any note. Mr. 0. Wells: I t simply relates t e t h e kind o f paper Which gan be accepted without @ statement, provided sither that such bill bears the signature o f the purchaser --- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ur. M e D o u g a l s Mr. 0 . Wells: "Contains a statement.* T h a t i s ali right. I t simply bears thie an signature and is rather essential i f we are te accept that class o f paper o n a different basis f r o m other clases of paper being offered b y another bank; i n other words, b i l i s of exchange o r paper i n merchandise transactions. The Chairman: I s i t not true that t h e country b a n k gets @ good deal o f paper with accomodation obligations either in one form o r another? Mr. O. Yells: T h a t would come under a different heading) This just refers t o paper given i n favor o f merchandise. The Chairian: I know that, but w e d o mek want, i n some way o r another, t o be able t o identify these notes which are given representing goods s o l d o r domestic acceptances which a r e practically 6 f the same character. Mr. 0. Wells: signature B u t suppose such a bill bears the o f t h e p u r c h a s e r a n d s e l l e r o f t h e goods. I s mot that sufficient t o stamp that a s being a bona fide conmereial transaction, a The Chairman: Mr. 0. Wells: mereyandise transaction? H o w can you identify that? B y the statement o f the bank that such &®bill bears the signature o f the purchaser and seller o f the goods, without saying that i t contains a statement o n its face, etc.. S u p p o s e t h e note does not itself contain that statement. T h e Federal Reserve Board h a s adopted t h e following m e t h e d b y w h i c h m e m b e r b a n k s s h a l l c e r t i f y r e d i s - count thereof: “Member banks shall certify that such a bill bears the signature o f the purchaser a n d the seller o f the goods.” https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis If you stop there y o u would identify t h e bill given in faver o f the bona fide merchandise transaction, c o t t e n or anything else, without tying orto it --- "contains a statement o n its face that i t i s issued f o r goods actually purchased e r sold.” Mr. Wolds T t must b e a part o f the note. T h e note itself must recite i t a Mr. O. Vells? I t would mot i f you struck out "contains & statement o n its faces* The Secretary: that statement. B u t t h e member b a n k does n o t certify T t goes further «-- Mr. O . Yells: I The Chairman: guess y o u are correct. I see, T h e effect o f A-l i s really a s follows; as I understand this: T h a t there will b e certain double- namcd paper issued a s trade paper representing a n actual sale o f goods, a n d that t h e parties t o the transaction - - - rs t h e parties t e the purchase and sale o f goods --- will make a note which will contain o n its face a statement that i t represents the sale o f goods and bears the application o f the buyer a n d seller; a n d i n that event a l i that is required i s the statement o f the member bank that i t complies with the provisions o f law and that i t i s eligibie paper a n d noting else i s required, Federal Reserve Board, T h a t i s t o say, t h e b y this regulation, h o p e s t o stimulate the making o r real trade paper, rather t h a n the present course of borrowing against a lot o f book accounts a n d possibly cet- ting a n accomodation endorsement o n the note i n addition. Mr. Seay: T s there not more danger that i f the makers of t h a t c l a s s o f p a p e r p u t e n d o r s e m e n t s t a t e m e n t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis o h it across the face, that there will b e such a s will very probably impair negotigbility? Mr. 0 . Wells: I Mr. Seay: I d o not think so. haye i n mind where i t was done, a n d i t did very seriously impair t h e necotiability o f the paper. Mr. © . Wells: . the C o m p t r o l l e r I s there n o t a ruling o f the office o f sho o f the Currency regarding what m e e e be termed bills o f exchange, which are acceptances, covering the movement of commodities, and which pro¢ide that wherever an excessive l o a n o f the member b a n k i s made, have a i f these notes definite d u e date they would a t certain seasons o f the year create a very large part o f the eligible paper under this ruling where t h e seller o f cotton draws a draft u p e n t h e buyer, a n d the buyer recites the fact that i t i s given for So many bales o f cotton. T t i s done frequently, because that e s t a b l i s h e d t h e f a c t t h a t i t i s a bill o f exchange, and therefore n o t amenable t o the restrictive ruling o f excess loans, very I t would open u p at certain seasons o f the year a/splendid class of paper for re-discount to the Federal R e s e r v e Banks, a n d i t @ 6 well, I think, s t i m u l a t e s the thing that you mention, a n d I believe w e can afford t o ieave i t i n there. Mr. MeCord: T h a t i s hargely true, too, i n interior towns buying u p Xxx lots o f cottons T h i s buyer buys 100 bales and the Bank pays sataak i t until h e gets the 100 bales. T h e o r i g i n a l p l a n w a s t o c a r r y i t a s a n overdraft and then they got around that b y giving this bill o f sale attached t o the draft reciting that there were 1 0 0 bales o f https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Cotton. T h a t i e the eniy way ther ean handle cemmedities in comeunities o f the South where cotten i s being moved, under t h e preaent workings o f the law. The Chairmen: T h i e s A-l appeals t e me as the kind o f regulation «hich voul 4rromote the conversion o f the tock ace eount w i t h t h e trade diseount i m the trade the banke a r e generally giad t e get. If $t i e not the opinion o f this meeting that w e showid Submit a Board recommendation i n regard t e that paragraph t e the « = I cannet g e e a n y serious objection tic in your opinion, sould b e the sit» remaining } Sisuse/ag i t is wpen other paper given b y & merchant t e & manyfacturer o r others i n payment for sere chandise, a n d not bearing a statement? T h e r e is a good deal o f that paper now. re O . Felis: I think y o u would have t e reanire a statement. Wr. HeBousal: i t would mike ineligibie, I helieve, a lergs amount o f the very best paper w e haveayailable now at times from some Sources. Mr. O. Vella: I f you strike thie out i t remains still, Mr. Cheirwan, ineligibie. Mr. Yold: i thereughly agree with y o u that that purer ig the eharagter o f paper that showld b e eneovraced t o be improved Silene lesitimate lines. P h a t I particularily objest t o in this is the lastelmuse, that i t centains « statement o n its face that i t was issued f o r goods actually purchased o r sold. I d o not think i t i s necessary o r essential, a n d I a m afgaid i t would destroy t h e hecotiabil- ity of the paper i n a great many cases. I do not think it would a d d anything t o it, because i f people a r e goins t o make i t they will d o i t i n spite o f that statement i n there. i think, possibly, w e could re-write that paragraph | and put i n a paragraph there covering trade paper without that clause. i d o not know whether i t would b e complete with that first clause o r not «---" such bill bears the signatures o f the purchaser and the seller o f the goods," T h a t does not apply t o it. “trade paper"? W h y not u s e t h e term E v e r y banker knows what trade paper is, if it i s a piece o f trade paper within a given amount, The Chairman: Y o u understand, Governor Yold, t h a t under the provisions o f 1-2, @ statement o n the face o f the n o t e t h a t i t i s i s s u e d f o r g o o d s a c t u a l l y p u r c h a s e d or sold would relieve t h e member bank from the necessity of putting the eligible statement o n the note. Mr. 0. Wells: A n d the latter clause would be the only means o f identifying i t m ase trade paper? Vr. Yeld: W e l l , make them certify i n their application. ire M M t h e enforcement o f such a regulation | Would drive some o f the very best paper i n the country t o the state banks. The Chairman: I beg your pardon, Governor McCord. it i s not & requirement; | is https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis expressed here. i t i s i n fact a Privilege, a s it I t says that all notes issed te, i n the f o r m submitted f o r rediscounting b y the Federal Reserve banks without t h e statement appearing o n the face »ith regard to credit files, T h a t is, i f it exeeeds $5,000 i n amount . Mri Wold: S u p p o s e y o u pass that b y until y o u get t o that credit f i l e parts w a y b e i f w e c a n eliminate t h e eredit file c u r troubles will b e over --- I mean, reference t o the credit files, I do net mean t o eliminate the credit file. The Chairman? T h e matter i s entirely i n your aialien Mra MaDoumals SnexGeakamanx 8 Mr. Yold: I will withdraw m y motion, Mr. Chair- L e t u s consider this whole business down t e the signature o f Mr, Hamlin, a s a whole, a n d then s e e where w e "get off", Mr, Seay: I Way . I think w e will make better progress t h a t t i s very diffieult t o consider a part witheut bearing u p o n t h e whole, Mr. Yold: S e c t i o n 2% " T h e aggregate amount o f obligations o f such depositer rediscounted a n d offered f o r rediscount does not exceed $5,000, but in no event the sum in exeess o f ten per Gent o f the paid-in capital o f the _member banks" Iam glad to see the bars let down; b u t when we let the bars down t o a 36, 000 bank and take notes equal t o ten per cent o f the capital, without a n y reference a s t o whether they have got a financial statement, without kaxieg being required t e furnish you w i t h @piece o f paper upon which toextend credit, it is a bad practice to start with. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T t is going t o the other extreme o f Circular No. i3,. Mr. MeCord: I f i t i s put i n there,: Governor Yold, i t Would b e possible for a $50,000 bank t o use one paper i n New York, another i m Chicago, a n d another over i n Indianeapolis, without making a statement t o y o u a s t o the condi- tion o f that concern. The Chairman: i McCord; d o not understand i t so, Governor m o t f r o m this regulations Mr. Pancher: T h e y might have t e n o f fifteen thousand doliars i n their files; Mr. Yolds: O f f e r e d f o r rediscount - - “but i n n e event & sum i n exeess o f ten p e r cent o f the paid-in capital o f the member bank." Mr. 0. Wells: I believe I would rather l e t i t stay in, b u t i f w e find i t i s difficult, w e will change i t i n a year o r so. The Chairman: T h s i regulation a s a whole i s a tre- méndous concession? Mr. Wolds I shovid say! The Chairman: T h e y have gone & e e towards meeting what they recard a s a pretty strong feeling among the reserve banks, that the circular and regulation first “put out shold be liberalized. 1 think we ought to con- sider whether w e d o not want t o take advantage o f this | opportunity t e get regulation that goes aleng w a y towards meeting what a l l o f the reserve banks have certainly desired,and that is, the ability t o de business without too many restrictions? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Yold: I am a member bank, a n d I come here t o Wew York and I have got $50,000 eapital, a n d I offer you @ $50,000 nete for discount --The Chairmen: matter. W e would u s e our discretion i n the Y e d o not have t o discount it. Wir. pancher: T h e mere fact that you certify i t does not. foree t h e paper o n t o yous Mr. Wold: I f that i s the way y o u construe it, I waive #11 objections. Yr. Seay: T h e y would take issue with y o u a n d use i t for a n argument, I a m sure about that; b u t y o u shoud] exere- cise your discretion, T I am sure you would, Mr. Strong, and I know somebody else that w o u l d . Mr. MeCord: I had o n e m a n who h a d a $1400 note a n d another note belonging t o the clerk c f the CountyyCourt f o r $900. w e certified that theywere eligible, took issue with hin. I and I told h i m I did not think t h e y were eligible unless h e could show m e that h e went i n t o some transaction. H e wrote m e and said, “Please send m e that paper back and I will b e gaid t o send you another paper i n its place. I Mr. Seay: recognize you are right and I am wrong.*® W h e n y o u make regulations specific, t h e mem- ber banks will offer y o u paper apparently complying w i t h the circular, Mr. MeCord: / t o refuse them, A n d i t leaves y o u less ground u p e n which T h e r e a r e & great m a n y captious bankers who take advantage o f that situation, Mr. Kaine: T h a t might c o m e i n just a s well under regulations Nos. 1 and 2. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T h a t tells you what t o doe Mr. © . Yells: T h e r e seems t o b e some necessity f o r - making s o m e regulation a s t o eredit file. T h e r e should be language i n there giving t h e right t e define commercial paper, that i t must make some definition o f commercial paper and furnish the banks with that definition, Mr. Seay: I page 1. think that i s very beautifully done o n Y I think they ought t o be congratulated, Mr. 0 . Vells: D e y o u believe that a means b y which that paper m a y b e identified? Mr. Yolds M r e Chairman, W o u l d i t b e permissible t o Suggest t h a t w e m a k e t w o circulars, o n e t o t h e Federal Reserve Bank for Governors o f the Beard, a n d one t o the member banks containing a definition o f commercial paper? it g o out a n d the general rewarks g o out. I L e t n this appendix, i f it i s going t o be sent out, let that g o to the member banks a n d where they a r e letting t h e bars d o w n here and giving t h e m more o r legs latitud@é i n determining t h e character o f the paper, let that g o t o the managers o f the banks. T h e y will exercise their ade discretion. The Chairman: G o v e r n o r Yold, I do not want t o sugzest, myself, a Solution o f the situation i n regard t e this Necibetiun a n d ask the meeting t o adopts anything that might | met b e good f e r you. I think w e ought t o endeavor b y dis- | ‘ qusaion to arrive at an opinion here that is farily uniform, and w h i c h w e can all acepet a s a recommendation. I can see the difficulty o f the Federal peserve Board i n putting out a regulation which states, first, t h e bare requirements of the statute, and, second, makes a definition b y statement https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis of principles, o r character o f the paper that i s eligible, and then practically s a y nothing t o the member banks a s t o how they shall errive a t a correct knowledge o r give such evidence o f the fact that i t i s eligible, a n d comply with that definition that they have made, w h i c h i s a statement o f principles rather than a procedure, I must s a y that I sympathize w i t h their desire t o let down the bars i n the case o f the small bank, permitting them t o discount paper f o r their customers without a whole ict o f red tape a n d credit f i l e a n d information that i t might takes years t o compile, a n d at great expense. O n the other hand, i f the statement contained i n subdivision 3 of this regulationis giing t o interfere w i t h t h e reserve banks in using discretion, i t appears t o give license t o the mamber banks i n requiring these almest a rediscounts o f cer- tain paper that i s t o somply with this, w e ought t o convey that t o the Federal Reserve Board a s our opimion. Mr. Kaine: I think there i s great danger with regard t o the country banks arising from the fact that the Federal Board issues-certain cireulars and the Federal Reserve Banks issue certain circulars, I would not have very much objeetion t o thid going o u t f r o m m y o w n office, ‘but I d e not like t h e member b a n k getting inte i t s mind that it can come and flaunt this thing i n my face and say "You have got t o d o it? I f you d o mot d o i t then they feel that you are not léving u p te what you sakt should do. Mr. MeCord: H o w would i t d o t o a d d this after the Second s e c t i o n s : — https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis "Nothing herein ¢ontained shall prevent t h e Federal 190 Reserve Bank from asking s u c h information f r o m time t e time as they m a y desire.* Mr. Fancher: W h e r e would y o u put that i n ? Mr. MeCord: R i g h t a t the end, after t h e words "*nem- ber banke i n the third line o f subdivision 2 . T h a t would meet M r a Wold's objection, I Mr. Wold: I think. have n o objection t o i t exeept a s giving to the member bank --Mr. MeCord: W h a t I mean i s that, t h a t your member banks s h o u l d n o t t h r o w u p t o y o u t h a t y o u h a v e g o t t e t a k e this paper, T h e y will say, “That i s all right. people a r e borrowing f r o m other sources." I These want t o know s o m e t h i n g a b o u t t h i s o t h e r p a p e r s Mr. Yold: W e have b e e n talking a n d writing t o o u r meme ber b a n k s a n d u r g i n g t h e m a n d i m p r e s s i n g u p o n t h e m the necessity o f getting their eredit files out o f their heads Upon paper a n d being able t e show u s the basis u p o n which t h e y e x t e n d eredit. T h i s goes o n a n d saysit i s not necessary; i f you know the man it is all right, The Chairman: G o v e r n o r Wold, t h e cure f o r the regula« tion o f that weakness that y o u have i n mind i s t o put not i n the middle o f the sentence, a s Governor MeCord sugzested; that is, a t the e n d o f subdivision 2 paragraph A , b u t a t of t h e the end of the wheole/third section, a statement that the Pederal Reserve Banks a r e i n n o w a y limited i n their right t e require any information they think best i n reagrd to any paper offered f o r discount? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. MeCord: T h a t nothing herein contained shall pre= vent t h e F e d e r a l R e s e r v e b a n k f r o m a s k i n e f o r s u c h i n f o r - mation a s i t may from time t o time d e e m advisable. Mr. Seay: T h a t i s e x a c t l y t h e p o w e r o f t h e federal. r e r serve banks want t o have; a n d i f you p u t that there i t seems t o me t h a t t h e r e w o u l d b e v e r y l i t t l e u s e o f h a v i n g w h a t i s Mr. Chairman, t h e board has splendidly defined, t appears t o me, andsplendidly interpreted t h e special requirements, a n d given t h e most accurate, dtativetive a n d graphic definitions o f what i s commercial paper that t h e y have y e t been able t o arrive at. congratulated. Then, T h e y a r e certainly t o b e “ i m a n e along with t h e statement that every member bank will b e required t o certify i n the letter o f application that t h e paper h e offers does conform t e these definitions a n d requirements, a n d there leave the matter and leave the rest t o the Federal Reserve bank? Every member bank will b e required t o certify i n the letter of application, “ g o v e r t h e signature o f @ duly authorized o f ficer, that, t o the best o f his knowledge a n d belief, t h e bill w a s i s s u e d f o r o n e o f t h e p u r p o s e s m e n t i o n e d in paragraphs I(¢c) and II(a) hereof, a n d that i t conforms t e the provisions o f the act a n d the requirements o f this regue lation. The Chairman: T h a t would n o t b e Governor Vold's suggestion. Mr. 0 . Wells: W e would have t h e further confusion that various i n t e r p r e t a t i o n s o f t h e requirements a n d t h e manner of c e r t i f i c a t i o n w o u l d b e g o i n g o u t f r o m t w e l v e F e d e r a l Reserve Banks, i f you should destroy this No. 3 , a s I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis understand y o u p r o p o s e Mr. Seay: t o do. T o that point, eliminating these t w o things. Mr. 0. VWelis; I t would leave t o the Federal Reserve bank the manner o f that certifibation? Mr. Seay: N o ; not the manner a t all. Mr. O . Yells: B u t y o u destroy t h e manner a n d the way i n which t h e certificate should b e made -«Mr. Seay: E l i m i n a t i n g 1 Mr. 0. Wells: and 1 A . T h e n y o u s a y the member banks shall mgcertify, e t c ? Mr. Seay: Y e s ; that t h e paper does conform t o the character prescribed b y the Federal Reserve Board. The Secretary: Y o u d o not take i t that t h e requirement does away with t h e right o f the Federal Reserve B a n k t o make f u r t h e r i n q u i r i e s Mr, Seay; O i f i t wants t o ? n t h e contrary, e x a c t l y , I t leaves i t open t o make inquiries o f a $500 note o r a $5000 note o r a $2500H note, Mre Wold: I f that i s the impression o f the other eleven Governors a s to that paragraph I withdraw all objection. The Chairman: W h a t i s y o u r suggestion, G o v e r n o r S e a y ? Mr. Seay: I am just discussing that now and not m a k i n g it i n the f o r m o f a motion. I t i s merely i n the discussion period, The Chairman: W h a t y o u have suggested would leave o u t of this regulation one thing that the banks i n Wew York will welcome v e r y heartily, a n d that i s the requirement t h a t a l l banks should have a eredit file; a n d this very distinction https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis has been s o prepared that after J u l y 15th t h e Federal Reserve banks will n o t b e authorized t o rediscount purchase paper w h e r e t h e m e m b e r b a n k s o f f e r i n g i t f e r rediseount c e n not certify that t h e y have c o t t h e information o n file, Mr. Wold: W e have g o t t o out that out? The Chairman: Mr. Wolds Y o u would cut that out? O h , most assuredly. The Chairman: Mr. Yold: A s t o purchase paper? Y e s , sir. T h i s stamp “chargeable f o r re- discount" - - - w e d o not want anything o f that k i n d o n the notes Mr. Fancher: I think i t i s very vital that that pro- vision b e fin there. I think t h e practice i s general o n the part o f the small countrybanks, a s t o small purchase notes, because t h e representative o f the paper says that i t i s a good thing. v h e r e i s too much o f that kind o f paper bought. They know t o o little about it. I requirement. A think that i s a splendid bank t h a t g o e s o u t s i d e o f its o w n territory and buys John J o n e s n o t e f a x three o r four throusand o r thres for four hundred miles away should have something i n its files; i t should know something about t h e paper. The Chairman: to putting a G o v e r n o r Yold's objection apparently i s statement: n o the face o f the note. P o s s i b l y your idea i s t o have that embodied i n the application itself and a n identification m a r k appear i n the form o f application as t o each piece o f paper? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Wold: I thoroughly agree with Mr. Fancher that there a r e t o o anmmy country hanks buying commercial paper on the 0. K. o f the correspondent, but I o r o n general princifles, d o not think w e should require t h e stamp o n these notes. T h a t i s n o justification f o r it. T h e y will b e coming u p t o know before t h e y b u y i t whether i t i s eligible, a n d then w e will b e u p against it. Mr. 0 . Yells: I n t h e p u r c h a s e p a p e r , M r . Chairman, it p o s s i b l e f o r t h e m t o g e t a signed s t a t e m e n t i s o f the nature? Chairman: I 0. Wells: Seay: think B O B u t this provides: Further f o r a signed statement o n i t m says, “ f o r a duly certfied Sopy.* Mr. O. Yells: C e r t i f i e d b y a member bank o r notary public, A s t o the ordinary paper bought w e d o not g e t & signed statement and you could not make a certified copy. Mr. Aiken: M r . Ghairman, i n the Yorchester b a n k w e almost never b u y @ piece o f paper without a s 4 general principle insisting u p o n having a statement covering t h e last fiseal year before w e b u y that paper. T h a t i s a rile of the bank. Mr. 0. Wells: W e always have @ copy, b u t w e d o not have i t certified, Mr. Aiken: I t does not a d d anything t o the cumber- someness o f i t t o have 2 t certified. The Chairman: Y o u will find that commercial paper: brokers, i f this regulation i s published requiring the certified copy o f the statement, will g e t e their customers “and say, “Now, i n order t o have this paper o f a character that we oan readily handle, instead of giving us a state- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2195 ment which w e manifold i n our office, y o u have g o t t o give u s those certified copies, a n d have your officers either sign all o f them o r else give u s a n original signed statement a n d let u s attach t h e officer's certificate.”® 4 doubt i f t h e r e i s a n y d i f f i c u l t y a b o u t t h a t a t all. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T h e vrokers i n New York a r e simeoly waiting t o know what t h e y a r e required t o dos Ur, FanchersThe Chairman: T h e y are surely expecting f o do that. W e wovld a l l like t o bring this discus- sion t e a conclusion, I know, a n d I think possibly w e c a n divide i t u p inte subjects end make recommendation o f subjects t o the reserve board. * The first subject, possibly, showld be the requirements of this regulation a s t o the class o f paper generally known a s purchase paper, D e e s anyone feel disposed t o meke & motion which w e c a n adopt a s @ general recommendation t o the reserve board a s t o t h e method o f dealing w i t h that Class o f paper known a s purchase paper after J u l y 15th, next, b y this regulation? Mr. Seay: I Mr. Aiken: think there m i g h t b e a special r u l e --M i g h t I sugsest, M r . Chairman, t h a t t h e Secretary b e requested t o draft a regulation t o b e submitted to this conference somewhat t o this effect: Incase of a bill purchased otherwise t h a n from one o f its o w n depositors t h e member bank shall certify ever signature in its application f o r rediscount t h a t i t has i n its credit files a statement @ f t h e financial c o n d i t i o n o f t h e bor- rower, t h e date signed b y the borrower o r duly certified b y 196 & member bank o r notary public t o b e a copy o f the signed statement. T h a t e a n b e included i n the aprlication, I think t h e r e i s s o m e q u e s t i o n stamp. I i n regard t o that do not like the idea o f sticking i t o n the note. It seems t o m e i t i s for the F e d e r a l Reserve Banl t o certify whether i t i s eligible o r not, a n d not f o r the member bank offering i t for redsicount, The Chairman: T h a t i s what w e a r e d o i n g now. V e are requiring member banks t o certify that t h e paper is eligible i n their applications, Do you offer that a s a motion, Governor Aiken, regard t o t h e subject o f purchase paper, in a s distinguished from customer's paper? * mH Mr. Seay: I The Chairman: second t h e motion. Y o u have heard Mr. Aikne's motion. I s there a n y further discussion o n that matter? Mr. MeCord: T a k e a town, say, o f five o r then thousand | inhabitants, with four o r five banks i n it: O n e bank i n the town might buy a note which will not he a trade paper, and yet that party may not have a n absolute deposit i n the bank. The Chairman: G o v e r n o r MeCordg w h e n this application has been made f o r rediscount o f such @ note, t h e member bank will b e required t o state, a s I understand, that i t i s either customer's paper o r purchase paper. O f course a n y member bank can attempt t o mislead the reserve bank i n its https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis statement, a n d i f there i s any doubt about i t i t will undoubtedly m a k e inquiry, a n d i t would n o t b e possibit f o r @ regulation t o define accurately what i s purchase paper. Mr. MeCerd: T h a t i s t h e troubie. The Chairman: not t i s possible t e accurately define I what i s customer's paper. I the d i s c r e t i o n o f t h e m a n a g e r d o not believe so. I o f the bank h a s a think gqod d e a l t o do with that, My. McCord: I withdraw o b j e c t i o n t o it. about a s good a s you c a n get it, I suppose. T h a t is Y o u wili have some little trouble along that line, b u t I will n o t be strict o n that i n m y district. (The m o t i e n o f M r s A i k e n o n t h e s u b j e c t o f p u r c h a s e paper, h a v i n g been d u l y taken, w a s put a n d carried.) The Chairman: I t seems t o me the next question t o sonsider i s whether t h e evidence o f the eligibility o f cuse tomer‘'s paper shall appear b y stamp o r endorsement o n the paper itself, o r shall b e confined t o statements made i n the application for rediscount. I am trying t o get i t b y a process o f elimination. Mr. MoeDougal: I f it is in order, Mr. Chairman, I would move that the evidence b e contained i n the formal application t o b e made b y the applying bank, rather than t o have it stamped o n the face o f the note. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. UoCord: I The Chairman: second that motion. I s there a n y second o f Governor M o e Dougal's motion? wr. Aiken: M a y I ask f o r information? 198 In different sorts o f foreign bills i s there a n y such endorsement a s t o what t h e bill Ss: for? The Chairman: A Mr. Aiken: great many, & && cs ~ considerable majiorit ¥ A n d acceptances? The Chairman: Y e s , bill o r a n acceptance or a O f course w h e n y o u speak o f a draft y o u a r e g e t t i n g i n t e terms that overlap s o that i t i s almost impossible t o distincuish. I n London a bill i s a n acceptance, practically @lmost without exception. H e r e a draft i s frequehtly a n acceptance wikkuutxaxmepkiuxx b u t m a y not b e considered t o b e @ bill. Mr. Seay: W h a t i s the form, Mr. Chairman, i n stating the nature o f the transaction? The Chairman: W h y , i t appears i n infinite variety i n the bills t h a t . w e see i n New York. I brought over a hundred sampies o f bills t o Washington n o t leng ago. S o m e o f t h e m read this way, after t h e body o f the bill: “ V a l u e r e c e i v e d against so m a n y b a l e s o f c o t t o n p e r s t e a m s h i p S o - a n d - s 0 ; l e t t e r o f Credit s o - a n d - s o . " Sometimes indicating 1 0 0 bales o f cotton, i t w o u l d j u s t b e 1 0 0 B.C,; A t other times i t will give the market. o n the bales a n d frequently i t would just refer to the letter o f credit under which t h e bill i s drawn. Mr. Kains: by some initial, M a n y times i t gives the name o f the firm o r something o f that kindy The Chairman: I have s e e n some bills that give an accurate deseription b y marks o f the goods against which the bill i s drawn, t h e name o f the customer, t h e place f r o m https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis which i t sailed, a n d the date o f its sailing, together with reference t o the letter o f credit. Mr. Seay: T h a t w o u l d i m p a i r t h e negotiability, pos- sibly, o f a domestic bill. The Chairman: I d o not believe w e have v e r y muog l a w onothat subject yet. Mir. Aiken; W e will get some before w e get through with t h e Federai Reserve Banks. Mr. Kains: S o m e English banks will n o t d o anything. They just p u t their names across, a n d they will n o t change it either, change it. I t 4 s a n illegal thing, b u t t h e y will n o t T h e y always pay. Mr. MeCord: T h e l a w merchant would govern that, I suppose. The Chairman: A r e you ready f o r the question u p o n t h e motion made b y Governer McDougal? (Cries of *Question.") (The motion o f Mr. McDougal, having been duly seconded, w a s put and carried.) The Chairman: T h e next question, i t seems t o me, i s as t o the character o f evidence o f eligibility w h i c h m a y be required o r permitted a s t o customer's paper, a n d that subject would divide itself into two parts. T h e first is, shall a n y special privilege o r advantage b e given t o paper which bears evidence o n its face that i t i s trade paper, double named tarde paper? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Seay: D o e s n o t that paper carry i t s o w n evidence? the Chairman: O f course, customs v a r y i n different https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis of the country, Governor Seay. a note for many years i t was the. practice f o r the maker o f note to draw i t directly t e the i e r o f the bank where the to was being discounted; e n d then, strange t o Say, friend, a n accomodation endorser, to efof the note just his name, T h a t had a n extraordinary endorsefect o f making t h e accomodation endorser f o l l o w t h e ment o f the bank before t h e note got negotiability. Mr. Seay: T h a t i s quite prevalent i n our district, fhe Chairman: T h e only advantage i s t o disclose quite endorse~ clearly that such a n endorsement i s a n accomodation ment. T h a t c u s t o m i n N e w Y o r k i s gradually d y i n g out. in meny cases n o w where accomodation endorsements os are obtained i t i s done either b y making2 t h e & ecomodation obligation the obligation o f the payee o f the note, o r else have t h e maker o f the note d r a w the note t o his o w n erder, a n d then endorse it. and have t h e accomoéstion endorser a d a his endorsement after that. W h e n a note i s drawn and properly drawn i n that w a y i t does obscure t h e character o f the note. I t does n o t disclose t h e fact thet i f i s a n aecomodation endorsement, a s i f m a y i n many cases, a n d a provision such a s i s contained i n 1-A i n this requirement would i n fact stimulate o r might stimu-~ late, t h e creation o f a class o f paper which would bear evidence o n its face that i t i s not o f a n accomodation character. Y o u probably a r e eware that v e r y much o f the Clafflin paper was drawn i n odd smounts n o t beceuse i t 201 represented a n account o f goods sold, but that each amount appearing i n the bill was a method which they had devised of locating the bill o n their books. practice, I t was a n ingenious i n fact, a n d i t was a n accomodation paper which was manufactured b y the subsidiaries a n d put o u t b y the Clafflin Company. I t hes been very wevyersly criticised. In the case o f a note representing t h e sele o f goods which bore t h e same evidence o n its face that i t represented @ gale o f goods that a draft for acceptance bears, such as we have been discussing, that would i n fact make i t pretty easy and simple for the Federal Reserve Bank to say, "this is trade paper. Thies is not a n accomodation note”; and, personally, I had rather favored the idea o f encouraging t h e making o f that paper. I f i t c a n b e encouraged, obligations of buyers o f goods f r o m manufacturers will b e more promptly met i f a note represents a n account, rather than just a n aecount o n the books. O m e company i n New York o f which I was a director for many years carried from five t o eight million dollars o f accounts receivable o n its books. I agked t h e president o f the company not very long a g o h o w h e that h e could adwould feel i f there were some good reason 2mxxgkxkugekinx -wance to the customers of his company for giving him a note https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis representing their account rather than t o carry i t along on the books. H e said i t would b e #11 right. "These people owe us millions. U e said, T h e y write us, when the account comes due, under the terms o f our selling arrangements, a n d say thet i t i s not convenient t o pay just now, ana to let it rum along thirty days, and we would rather https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 202 have @ ® note that h a s got t o b e met, o r they are i n default.” There are a great many dealers that would welcome anything that would stimulate the conversion o f book eccounts into notes, On the other hand, there i s another class o f merchants in few York who state that i t would b e very difficult t o bring that about becense their customers are i n the habit o f getting o u t o f contracts, e v e n where t h e goods have been Shipped, b y claiming shortage i n weight o r difference i n quality. I f they have given ae note they camnot make a eleim back o n the seller; b u t i f i t i s a n open account t h e y just simply ship t h e goods b a c k and s a y they are n o t u p t o stend~ ard, “and w e want you t o credit i t back o n our account." TI think those merchants would b e glad enough t o have that; but they think i t would b e a very diffieult think t o control their book accounts now, Mr. Kains: T h e wholesale houses i n New York, where they sell their goods a l l over the country, d r a w from t e n to twenty o r thirty thousand dollars a n d g e t a n acceptance in, a n d when they discount t h e m a t the bank perhaps 2 5 per eent come back. T h e y always heave a note protest slip attached t o them, and they are charged back t o the firm. The Chairman: T h e Federal Reserve Board was undoubted- ly trying t o bring about a most desirable thing, a n d that is to stimulate the making o f trade paper thet i s issued b y sellers o f goods a n d discourage t h e maxing o f single name paper that i s issued b y sellers o f goods t o enable t h e m t o eerry their customers’ accounts, a n d their customers a s k https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis for extensions, I think i f this meeting would care t o make a recommendation to the Federal Reserve Board i n regard t o that matter they would heed i t and give i t eareful consideration, Mr, Seay: T h a t i s a very great thing t o be brought about. T h a t would b e one o f the most widespread goods t h a t ean b e achieved b y the operation o f the act. Mr. Aiken: I think we can afford t e take s o m e trouble with out customers for the sake o f encouraging that praetice. Mr. Seay: But I do not s e e where that would neces- sarily operate toward bringing that condition about. She Chairman: ‘ T h a t i s the first s t e p i n that direction, Hr. Seay, i n that i t eliminates t h e necessity o f a stamp o n the face o f the paper, o r a kind o f evidence that is required a s t o paper that dees not furnish i t s o w n ¢evidenee o f its eligibility. Mx. Wold: T h a t character o f paper i s a paper that & great m a n y o f us are very glad t o get. not require any stamp o n it. ig necessary. W e do W e d o not think any stamp T h e banker can detect i t when h e sees it, and the fact that i t was said i t was meeting a l l requirements would not make i t a n y better, t o m y notion, o r would or enhance the value o f the paper; b u t i t might impair its negotiability. Ur. Aiken: H o w would s u e h a note resd? “ S i x months after date I promise t o pay John Jones 85,000, payable at the National C i t y Bank. T h i s note i s given i n payment https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis --- and signed b y John Jones? The Chairman: I should say, Governor Aiken, thet i f this regulation had any effect a t all, i t would probably result i n merchants using e form o f note which would i n some way embody t h e words “issued f o r goods actually purchased o r sold." O r , "issued for goods actually sold", o r something o f thet sort. T h e t would b e i n compliance with this regulation, ur, Wola: Y o u would have t o indicate t h e maker was the buyer ani the payee was the seller. [ f t says the buyer end seller, Mir, 0. Wells: T h e r e seems t o b e n o good reason w h y the language there should not b e left. The Chairmen: O f course “contains a statement o n its pretty specific. I t might meet the views o f the Federal Reserve Bosrd i f i t says, “Contéine é h e evidence o n its face”, o r something o f that sort. H o w e v e r , I have n o t the slightest intention t o urge this language o n the meeting, i f it is your judgment t o strike i t out entirely. My. Wold: I think we ought t o use the term “trade paper” i n there i n some way which will not make i t cumbersome, b u t w e will have t o educate n o t o n l y the country bank-~ er, but ali the country merehants and dealers a s t o the form of note, a n d raise t h e question o f its negotiability after it i s made. The Chairman: W i l l anybody make e motion t o clear this thing up? Mr. O . Wells: I move t h a t t h e S e c r e t a r y b e r e q u i r e d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis draft a paragraph covering it. Wold: I MeCord: second t h e motion. F o w would i t b e t o suggest t h e substitu- tion f o r t h e w o r d “ a n d " t h e w o r d “ o r ” ? bears the signature o f the purchaser and the seller o f goods, o r contains a statement o n its face that i t was issued f o r goods actually purchased o r so1d.”" Mr. Seay: H a v e w e not, b y eliminating that stamp on the paper, d o n e something thet will n o t discriminate in any event between these t w o characters o f p a My. 0 . Wells: W e simply remove i t from the paper a n d put i t o n the application. know; b a t instead o f " i n the case o f & bili w h i c h h a s b e e n d i s c o u n t e d f o r o n e c f i t s o w n d e p o s i t - ors", read, “when such bill bears the signature o f a member bank i t will b e required t o certify i n the letter o f application"--Mr. 0 . Wells: The Chairman: I W e have n o t come t o that yet, have attempted a n entirely n e w divis- ion o f these matters b y elimination. Mr. MeCord: H o w thet t h e motion h a s prevailed, I moye t h e adoption o f the statement a s t o the whole subject. Mr. McDougal: I Mr. MeCord: sections 1 d o not u n d e r s t a n d . t a h t T h e whole business--- t o g e t r i d o f it, to 3 . G o v e r n o r McDougal puts i t i n the f o r m of a n application, a n d not o n the paper. Mr. MeDougal: . That does n o t cover this 1 - A rule. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 206 Mr. Wold: W h a t d i d the Council determine o n that, i f we c a n ask a t this stage o f the game? Mr. Seay: W e were supposed t o arrive a t a n inde- pendent judgement. I think i t would b e stealing a march for m e t o say. Mr. Wold: I think that some reference should b e made there t o trade paper a n d permit u s t o teke i t without t h e stetement t h a t w e are satisfied that t h e maker i s good. We have reasonable assurances that i t will b e good a t matur- ity, but I do not think we want t o throw a lot o f conditions in the way the note should b e drawn. N o t e s are drawn i n forty different w a y s i n this country. The Chairman: M a y I make a motion i n this matter and have y o u put i t ? Mr, Wold: I have been doing most o f the talking. I think maybe i t is time for me t o make a motion and let somebody else talk, The Chairman: Y e are discussing m o w recomendations to the Federal Reserve Board, without attempting t o put them i n language for the regulation. W o u l d i t be your view to recommend t o the Federal Reserve Board thet t h e regulations should provide that where a note offered f o r redis- eount bears s u c h evidence that i t i s made b y the purchaser of goods and i s endorsed b y the seller o f goods, o r where the bank i s able t o certify o n the application thet the papor is made b y a purchaser and endorsed b y a seller o f goods, o r i n the event any other evidence o f eligibility will b e required t h a n the certificate o f the bank t o that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis effeet--Wr. Wokhd: I should think that allowed a good deal o f latitude f o r the banks t o determine. Mre O . Wells: Y o u l d that come i n under t h e certificate of eligibility, withort specifying this particular class o f paper? She Chairman: T h a t was Mr. MeDougal's motion; that ¢6liminated t h e credit file, Mr. MeDougai: I n m y original motion regarding 1 - A I moyed t h e t the words-~-or I intended t o move, a t least--- that the words following "goods", a l l the remainder o f that paragraph, d e stricken ont, a n d I think n o w i f i t were stricken out and the words “such bill bears the signature of the purchaser a n d the seller o f the goods" remaining in, and nothing else, i t would still stimulate o r encourage t h e use o f the o l d style commercial paper o r trade paper. I t seems t o me that would b e enough t o leave there. lire Wold: L e a v e out the words “buyer and seller o f goods"? 0. Wells: Nos; you would have to specify. T h e y might b e buyere and sellers of goods and yet not represent the transaction for goods. T h e goods means the goods for which i t was given. dir. MeCord: T h e seller o f the goods fer which the note was givene Mv. Seay: D o e s that cover your idea, Governor Strong? The Chairman: Yes; I think so. I s there a motion, Governor MeDougal? Mr. MeDongeal: I would move that 1-4 b e changed t o https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis read “such bills o r such bill bears the signatures o f the purchaser a n d t h e seller o f the goods," am afraid, Governor McDougal, thet fhe Chairman: I the sentence would not b e complete, Mr. MeDougel: W e l l , add "for which the note was Then i t implies whatever that may be, MeCord: T h a t covers it, Chairman: MeCord: I Chairman: I s thet motion seconded? second that, I s there a n y further discussion o f Governor MeDougal’s motion? (There being no further discussion, the question onMr. MeDougal's motion was put and carried.) The Chairman: T o review the situation a s it now stand, a s I recall it, w e heave adopted page numbered 3 without modification. W e have adopted a resolution recommending thet eredit files b e required after July 15 as to so-called purchase paper. W e have adopted a recommendation that evidenee o f the eligibility o f paper offered for discount b e confined t o the application blank a n d should not b e required t o b e stamped o n the face o f the note. Governor MeDougal's motion is, i n effect, a recommenda- tion that a s t o eustomer's paper n o reference t o a credit file i n the application blank will b e required i f the bills offered f o r discount b e a r the signatures o f the purchsser and seller o f the note for which the bill was issued. We now have t o consider that class o f customer's paper which i s not self-evident a s trade paper, a n d that question - aivaes itself into two headings. If you consider thet t h e small bank, t h e wmuntry bank, Should have t h e privilege o f simply certifying paper s s heing eligible, without a n y reference t o a credit file; i n other words, whether a credit file standard should b e adopted after July 15, a s t o eustomer'’s paper o f a denomination i n excess ef the amount t o be stated--Mr. Aiken: M a y I ask information before that i s brought up? U n d e r m y motion which I asked t o have t h e Secretary draft; d o e s i t preclude restricting credit files requiring eredit fihkes f o r customer's paper? I understood y o u t o say that the requirement o f credit files was eliminated except a s i t applied t o purchase paper. The Chairman: lo» Mr. Aiken: B e c a u s e thet was not what I wanted, lir, Seay: W i t h reference t o that point, t h e Federal Advisory Council made this recommendation. T a k e the last paragraph f o r the purpose o f enabling i t t o f i x the certi- ficate, they recomended the elimination o f those words, and then recommended that t h e paragraph should commence a s follows: "Every member bank should"--=not shall---"maintain a - @eredit file which should contain a statement o f the financial https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis condition o f the borrower, e i t h e r signed b y the borrower, or duly certified b y a member bank o r a notary public t o b e a copy o f the signed statement.” Thereby making everything advisory instead o f manda- tory, and suggesting t o the member bank thet i t do it, and https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 210 referring i t t o the Federal Reserve Bank i n dealing with the members t o bring i t about a s best i t could. The Chairman: C o n s i d e r i n g t h e recommendation o f the Federal Advisory Council, i f w e follow their recommendation . we m a k e n o m a n d a t o r y r e q u i r e m e n t w h a t e v e r a f t e r J u l y 15th. I mean that w e recommend n o mandatory requirement a f t e r July 15, a s t o eredit files f o r customer's paper. Mr Kgins: B u t personally have n o t w e the right, t h a t is, e a c h bank, t o insist o n that? Myre Wold: W h e r e ? lire Kaine: Start. I W e sre certainly doing i t right f r o m the have heard a l l this time about n o t getting credit files, b u t I do not give a n y money unless t h e y give m e a statement. Mr. Seay: T h a t i s the idea, t h a t t h e Pederal Reserve Banks would have their o w n insistence u p o n that. ir. MeCord: M a y I state what some o f our lerger banks in Atlanta s a y about that? T h e y say, “Tur W e are very glad i n deed that s u c h a recommendation h a s been put in, because w e can not tell o u r customers w e want their statements." The Chairman: I would like t o tell y o u a conversation that I had with the president o f one o f the largest banks i n New Y o r k b e f o r e I came o v e r her, a n d o n e o f t h e b e s t b a n k e r s in New York, whom you all know, I have n o doubt. H e said, "I a m very glad t o feel that the Federal Reserve Board are going to begin to establish a standard o f information for the banks t o obtain f r o m their customers i n regard t o credit. He said that o n e o f the greatest difficulties t h e y have i n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis their bank i n the competitive system i s t o get their large borrowers o n a basis where they feel that there i s some real pressure f o r credit information that t h e y have f o t to respond to. T h e account t h a t h e stated a s illustrating this point w a s @ very large account carried with a nugber o f $800, other Hew York banks, where his bank had got a line o f 000, and this eustomer had recently asked for a n additional discount o f $200,000, H e said, “The Reserve Board now are going t o giximge exact more information i n regard t o paper that i t eligible t o redisecount. Y o u have never given u s a satisfactory statement o f your affairs, a n d w e know that y o u are very large borrowers. W e are not going t o increase your loan unless y o u give u s the information,” The never h e d given a detailed statement o f their af- fairs, a n d they said, "Oh, well, under those conditions o f course w e will give younour confidential statement." T h e y dia so, a n d the statement w a s anelyzed a n d they g o t Some o f the very large borrowers f r o m some o f the biegest banks i n New York, u n d e r t h e influence o f their ability t o go to some other bank i f they d o not get everything they want a s a matter o f right, have been withholding f r o m the banks what i s very proper information. A n d whether t h e stimulus t o better standards o f information in regard t o commercial paper comes directly f r o m the Federel Reserve Goard i n the shape o f a regulation, o r comes +o all the member banks i n the shape o f a mere private communication t o the Reserve Baugks, I do not believe makes https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 212 much difference either t o the reserve board o r t o the reserve n k e , got now. a a s long e s the member benks feel that t h e y have good, s o u n d b a s i s o n which t o r e q u i r e m o r e i n f o r - a standpoint o f. H e w York City, where very large loans are given a n d where considerable embarrassment arises i n getting think t h e b a n k s d i t information, i n Hew ‘ eome t h e excuse t o demand I a m sure district, a n d I have h a d some bankers write that t h e y were only s o r r y t h a t i t w a s n o t r e q u i r e d t h a t t h e r e s h o u l d b e s sworn statement. I a m telking o n both sides, now, (Laughter) believe i t i s m e c t i o n a s t o w h e t h e r i t should come from the Reserve Banks o r come f r o m the Reserve ®oard. I believe thet i s the point. The Chairman. W e have got t o meet two situations i n regard t o credit files, ‘ T h e r e i s n o question about that. Much objeetion h a s been made t o the proposition thet a smaller country bank should require statements from farmers and other borrowers who really are not in a position t o give statements because they d o not keep books. i I believe "£t would b é @ very méterial assistance t o the reserve board i n starting out o n a sound basis e s to credit information i f this meeting should make some general recom- mendation a g to its standard o f information a s to the reserve banks, n o t a s a part o f this regulation, b u t still https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis have something that would govern their conduct and then exempt from the operation o f thet regulation that class or d e s e r i p t i o n o f p a p e r w h e r e i t w o u l d b e i m p o s s i b l e or very cumbersome o r embarrassing f o r the emall banks. If yo can adopt a recomeendation that will cover those two points I think w e will have something that will b e o f mater- ia@l advantage. a m very m o h surprised, M r . Chairmen, Mx. Wold: I to hear y o u state s u c h conditions i n New York. T h o g e condinot a p p l y i n t h e T w i n Cities. would like t o ask Governor McDougel what Keine: I proportion o f the borrowers submit statements? iy. MeDougal: I could n o t tell y o u exactly what pro- portion, b u t I could tell y o u that i t i s a wory large preportion thet d o submit them; a n d t h e eases that d o not are rare exceptions. T h a t h a s been m y observation. In our large banks there i s not ea loan of any importenee that t h e y have n o t statements; n o t one; and regularly, e v e r y year, there i s 4 statement. Ur. Wold: I n the T w i n Cities t h e y not only require statements, b u t that they must b e made b y certified accountants. The Chairman: T h e r e i s this curious situation i n lew York thet does n o t prevail i n other cities. T h e N e w York banks generally have the sccounts o f those concerns that sell paper, a n d they are not ordinarily v e r y large lenderse As long a s there i s a market for commercial paper those banks have never been called o n t o extend very large lines \ of accomodation, b u t just a s soon a s bad times arrive these https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 14 borrowers d r o p down pretty heavily o n the N e w Y o r k banks. I ean name t o y o u richt now, a concerns that t h e open dezen very important t make s t a t e m e n t s , h e i r accounts and wi York b Do t h e s e c o n c e r n s to beokers? Mr. MeDougeal: I not. T h e others, d o not know. Mr. Yains: TRaes kmow o f three o f those firms who d o u s e d t o have accounts l i k e that i n Sean a £PEMCLSCSs : leguoDci© l remember. Ere Aiken: I t was mot i n any form, w a s lire HeDougeal: T h e i r last statement w a s d u e some time ey quit, a n d i t was slow i n coming out, b u t they were i n the habit The ing this however. a d s t e t e m e n t s . m afraid I a m guilty, now, o f delay- o not withdraw anything p r e p a r e d t o advance some suggestion, ty way o f motion, o r otherwise, a 8 t o the subjeet o f credit t o customer's paper aanwda } h o w i t with r e ference 2 should b e d e a l t w i t h i n a recommendation to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 215 That i s t h e i a s t i t e m o n t h i s program, e x c e p t t h e a p p e n - dix. Wold: C u s t o m e r ’ s p a p e r o r purchase paper? Mr. Seay: I a m o f the opinion, Mr. Chairman, t h a t if the paragraph were made t o read i n the m a m e r I suggest ed---snd afterwards w e will make i t more rigid, maybe--- the suggestion would be followed. S u t do not make it so figid that i t cannot b e departed from, o r there will b e cases i n which t h e y m a y mever b e able t o request i t and g e t it without difficulty; b u t a suggestion o f that nature would, be very forceful, a n d I believe i t would bring about a n improved condition. Mr. Wold: I to require a d o not think i t would b e a n y hardship statement. W e require it. Mr. 0. Wells: M r . Chairman, could such language b e employed a s would permit t h e smaller paper a negative requirement, r a t h e r than a positive one, a s i s used here b y saying that credit filed shall b e established a n d maintained &S a requirement o f eligibility u p o n e l l paper offered f o r rediscount i n exeess of $5,000, and, b y implication, leave papers below £5,000 purely i n the hands o f the Federal R e serve Banks? W o u l d that meet t h e objection expressed early in the evening? The Chairman: The > Substantially the effect o f this; Mr. 0. Wells: Tha 8 substantially the effect, but does i f quite meet t h e objection advanced some little time b a c k a s t o making i t prominently before t h e member banks that i t has a right t o offer rediscount paper u p t e $5,000 without a statement? fhe Chairman: Yes; I see t h e point. T h e n , Governor Wells, y o u r suggestion i s that a separate circular b e issued to the Federal Reserve banks, 9a n d n o t made a part o f this regulation, w h i c h will advise t h e manag ment o f the Federal Reserve Banke thet t h e y shall require member banks t o maintain eredit files a s t o their customers, b u t that r e quirement m a y not b e exacted id” those ceases where t h e paper offered f o r discount does not exceed £5,000 i n amount b y any one borrower, o r does n o t exceed t e n p e r cent o f the paid-in capital o f the member bank? Mr. O. Wells: I am not following the order establish- ed before t h e making o f recommendations t o the Federal R e serve Board covering t h e subject matter. I thinking o u t l o u d a s to whether was simply o r not w e could n o t make such a recommendation thet the requirements o f eligibility shall b e maintained i n a credit f i l e which shall apply t o customer's paper, b e i n g obligations o f depositors, rediscounted o r offered f o r rediscount, i n a n amount i n excess of $5,000, and, b y implication, leave the smaller amounts t o the j u d g m e n t a n d d i s c r e t i o n o f t h e F e d e r a l R e s e r v e B a n k a n d still p u t i t i n the circular? Mr. MeCord: I think thet m y s t a t e m e n t . e d a m i n the beginning would eover t h e whole thing---one circular, a n d be done with it. l e t i t stand a s i t i g there i n print. "Hothing herein contained shall prevent t h e Federal Reserve Banks from calling for any statement and making investigations a s t o credits.” https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 217 That gives y o u leeway. I t vives t h e banks t h e privil- ege o f discounting that small peper i f they s e e f i t t o d o so for a sountryman a n d n o t requiring a statement, a n d yet it seems t o m e i t does give t h e m the privilege o f ealling for i t i f they want it, The Chairman: I t will take a motion t o clear this up, gentlemen, Mr. MeCord: A l l right; I will meke thet a s a motion, if I ean get a second t o it, thet that language b e inserted, Mr. MeDougeal: T h a t will net complete the document. Mr. Fancher: I t seems t o me thet the Federal Reserve Board was attempting t o simplify these regulations and t o make them workable w i t h t h e small bank, a n d t h e serious o b jection h e s come f r o m the small bank. I f you provide some limit y o u c a n take a s t o small notes, without requiring a statement, a n d permit the Federal Reserve Banks t o exact such information a s m a y satisfy them a s t o the strength end eligibility o f the payer, a n d then make mandatory above & certain limit that after July 15 they have credit files above a certain amount. ire Seay: T h e t goes b a c k t o A-1 a t the t o p o f Chairman: N o » A-2. Seay: Y e o ; A-2; t h a t i c right. Wold: T h e only objection I think the most o f us have i s that the statement i s stemped upon the face o f the note. Mre MeCorad: W e have eliminated that, o r a t least we have recommended that that h e put o n the application blank, b u t not o n the note. ir. O . Wells: T h e stumbling block i s whether w e shell accept this alternative. The Chairman: I move that i t is the sense o f this meeting that w e recommend t o the Federal Reserve Beard that t h e Federal] R e s e r v e B a n k s b e required, o n and after July 15, t o get evidence from the member banks that they have credit files i n relation t o borrowers whose notes are offerred for rediseount except i n those eases where the amount borrowed does not exceed a maximum t o b e fixed b y a later diseussion here, ir, MeCord: Y o u mean b y that t o make i t mandatory upon the member bank t o maintain those files? The Chairman: M a n d a t o r y o n the reserve banks t o require evidence f r o m the member banks that they have eredit files a s t o the affairs o f eustomers whose notes they offer- ed for discount where they exceed a minimum amount. ir, Aiken: I second the motion o f the Chair. (The motion, having been duly seconded, w a s put and earried,) Mr. 0. Wells: I move you, Mr. Chairman, that that limit b e fixed a t $5,000. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Fancher: O r not over t e n per cent o f the capital. MY. Siken: T h e t i s i n accordance with A-2. QO. Wells: Fancher: I Wold: D o I get a second t o that? second thet motion. M a y I offer a n amendment? Chairman: Y e s . Wold: T h a t i t b e left t o t h e aiseretion o f the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Reserve banks Mr. 0 . Wells: I think the lemguage o f Govemnor Strong covers that. Mr. Wold: B u t with reference t o loans o f customers o f $5,000, where i t does not exceed ten per cent of the capital, the question mey b e referred t o the judgment o f the Federal Reserve Banks. The Chairmen: Y o u would exact that a s mandatory? Mr. 0 . Wells: Yet. The Chairmen: M r . Second, w i l l y o u accept that? Mr, Pancher: Y e s . The Cheirmen: I will repeat t h e motion, i f I may, thet the eredit files b e required, i n the case o f customer's paper, except where t h e amount d o e s n o t exceed t e n per cent of the capital, a n d that t h e requirement a s t o eredit infor- mation, eredit files, ete., o n borrowings not exceeding $5,000 o r ten per cent o f the capitel o f the member banks, be within the diseretion o f the Federal Reserve Bank. Of course that languege ean be dressed up, (The motion, b e i n g duly seconded, w a s put a n d carried.) Mr. Wold: I move w e now proceed t o remove the appendix. (Laughter) There a r e o n e o r two requirements there t o b e included in credit information that i t seems t o me are going t o meet with a great deal o f opposition, o n e o f which i s D, whieh provides a maximum e n d minimum amount o f short time loans during t h e preceding year and the anticipated maximum https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis during t h e present year. Mr. Seay: W h a t i s the other one? Mr. Wold: A statement evidencing t h e purpose o f such short time l o a n and t h e policy o f the borrower, ete. The Chairman: H a v e you a motion o n thet subject, Governor Wold? Mr. Wold: I offer the motion that w e recomnend t o the Federal Reserve Board that thet b e eliminated. Mre Kaine: I second thats Mr, Aiken: I would like t o know just what Governor wishes. The Chairman: T h a t w e eliminate D and &. Mr. Aiken: I would like t o s a y that i t has been o u r practice t o insist o n a statement o f the m a x i m a borrowings. We want t o know a man's maximum loan, and I should b e sorry to have thet cut out, because I think i t is a very important thing to know. W e have wool concerns i n Boston who a t times owe very little, and at other seasons their borrowings go up s o large thet they are ashamed t o tell you how much they d o owe. T h e y are perfectly enormous i n proportion t o | the capital o f the business; a n d I consider that very important and necessary. Mr. MeCord: W o u l d not this b e true, that the statements thus would shew the financial strength o f the firm o r corporation? W o u l d i t also b e true that i f they a i a under- stand their feelings it would be largely in a commercial way, < a f because i t would b e handling the commerciel product o f the country a n d would not i t also b e impossible f o r a n y concern https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis R21 to s a y t o what extent t h e y would u s e their eredit? I would a n t o u t t h e anticipated statement. I have i n mind @ concern that, when i t is down to the minimum, owes shout $200,000, and it goes up to five millions maximum. Mr. 0. Wells: I f we should eliminate D and E it still would n o t preclude Mr. Aiken f r o m agdcing f o r thet i n é formation i n eases where h e felt like i t was desirable. 5 0 I say thet a s « general thing i t might b e eliminated because it i s objectionable. The Chairman: I s there any motion a s t o the rest o f the appendix? Mr. MeCord: The Chairman: Mr. Wold: I . I move t h e t w e r e c o m m e n d t h e e l i m i n a t i o n I s that motion seconded? offer a motion t o that effect. ir. McCord: T h e n I second his motion. ( L a u g h t e r ) (The motion, being duly seconded, w a s put and car- ried.) Mr. Aiken: I would suggest thet the title, "Informa- tion t o b e ineluiea", b e carbene & little. My. Keine. “Suggested tio be included”, f think ought to b e pnt in, The Cheirman: W i l l you make thet a s a motion for the purposes o f the recert? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Yes. fhe Chairman: G o v e r n o r EKains offers t h e motion that the words "suggested" b e pat before t h e word "informetion" in the section o f the appendix. (The motion, haying been duly seconded, w a s put and carried.) Mr. Seay: T h e t i s not very greatly different from the suggestion o f the Advisory Couneil. (Further diseussion took place which the stenographor was direeted n o t t o report; a f t e r which t h e follow- ing oeeurred: f Mr. MeOord: H r . Cheirman, w e have taken this u p b y sections, but the firet part o f the circular has not yet been adopted. “he Chairman: My. MoCord: T h e Cireuler itself? Yes. The Chairman: H a v e y o u a n y suggestions about Cirenler Hoe 3 , Governor McCord? lir.O. Welle: . T h a t w e strike o u t t h e last paragraph? Mr. MeCord: No; w e took no action o n that.: She Secretary: T h e motion w a s made b u t not put.: Mr. 0. Wells: I move that w e recommend the elimina-. of the lest paragraph o f the cirenler,-: The Chairman: Mr. Seay: I I s G o v e r n o r Wells’ m o t i o n seconded? was under the impression thet that h a d donee. The Chairman: T h e motion w a s made a n d then withdrawn https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Seay: I second the motion. The Chairman: I s there a n y diseussion o f that motion? Mr. Kains: I agree w i t h that, s o I wili n o t vote for it. I think whenever possible, t h o s e rules should b e encouraged. Mr. Seay: W e have modified them very seriously. Mr. Kains: I know, butnas a rule they are all right. The Chairman: I think, gentlemen, there i s misundéder- standing about t h e meaning o f this last paragraph. last paragraph, The i n fact, means that while Circular No. 1 3 has been withdrawn, nevertheless t h e rules preseribed i n Cireular No. 1 3 and regulations 2 , 3 and 4, should b e observed a s a matter o f banking prudence. Mx. MeDougal: T h a t i s the very reason thet I think it should b e stricken out. T h e statement itself states it i s t o supersede cireular No. 13; so, therefore, I think itwould be well to eliminate Cireuler No, 15 entirely from consideration. fhe Chairman: I think Governor Kains had the idea that this last paragraph referred t o the present reguletion. I t refers t o those thet have b e e n superseded, Governor Kains. (The pending motion, having been duly seconded, was put and carried.) The Chairman: Y o u have a l l been furnished with the tentative regulation i n regerd t o the purchase o f revenue warrants, a n d are familiar with those provisions, a n d I regret t o s a y that I have n o t s copy o f i t here. W e are https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis asked t o conbider that regulation, a n d if you eare t o diseuss i t and act o n i t without having a do that now. copy here w e c a n I t i s the n e w one which h a s been adopted and sent t o all t h e Federal Reserve Banks. We will n o w take u p the tentative regulation i n regard t o revermme warrants. H a v e y o u a n y suggestions o r recommendations t o make t o the Federal Reserve Board i n regard t o that regulation? Mr, Aiken: I have wondered i f it was not possibie t o inelude i n that serial bonds maturing within six months. Under the laws o f the Commonwealth o f Massachusetts covering serial bonds provisions for payment are made from the tax levies under chapter 27, Section 13, o f our revised laws, as follows: "A city o r town, instead o f establishing a sinking fund, m a y vote t o provide for the payment o f any debt b y such annual proportionate payments a s will extinguish the game a t maturity, a n d thereupon such annual proportion shall, without further vote, b e assessed under the provisions ef section 3 7 of chapter 1 2 until such debt i s extinguished. "Chapter 12, Revised Laws, Section 37, "The Assessors shall annually assess taxes t o a n amount not less than the agzregate o f all amounts appropriated, granted o r lawfully expended b y their respective cities o r towns sinee the last preceding annual assessment and not provided for therein, o f all amounts which are required b y law t o b e raised b y taxation b y the said cities o r towns during said yeer, a n d of all amounts necessary t o satisfy final judgment egainst https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 225 the said cities o r towns during said year and o f all smounts necessary t o satisfy final judgment against t h e said cities or towns; w h i c h assessments shall n o t include liabilities for the payment o f which cities o r towns have lawfully voted t o contract debts. T h e assessors m a y deduct t h e amount o f al] the estimated receipts o f their respective cities o r towne except f r o m loans o r texes, which a r e lawfully applieable t o the payment o f expenditures o f the year from the amount required t o b e assessed; b u t euch deduction shell not exeeed the amount o f such receipts during the preceding year." That makes a specific provision f o r the payment o f those gerisl bonds from the tax levy i n the year i n which the bonds fall due, The Chairman: W i l l you effer a motion for a recommendation t o the Federal Reserve Board o r a modification o f this regulation which will include serial bonds, t h e payment for which i s provided o u t o f the t a x levies? Mr, Aiken: I will. Mr. Kaine: S e r i e l bonds o f what? Mr. Aiken: C i t i e s o r towns. Mr. ¥Yains: Municipalities? Mr. Aiken: Yes. Mr. Fencher: I second thet motion. T h a t i s i n line suggestion made b y the Board. Mr. MeCord: I want t o amend that, i f I may. P i r s t I would like t o asc how about bonds o f a stéte maturing within s i x months? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 226 The Chairman: I believe that i s a different subject. Can w e not dispose o f this a n d then take u p yours? (Mr. Aiken's motion, being dult seconded, was put and carried.) fhe Chairman: N o w , Governor McCord. L e t m e briefly state a situation that might Mr. MeCord: be valuable i f we can get i t through. T h e State o f Georgia has a Lot o f bonds maturing i n May, a n d t o the first o f Jaly, 1915. T h e y have @ considerable sinking fund. A t the seme time t h e legislature o f Georgie has provided f o r the refunding o f such debts a s the sinking fund does not sake eare of. T h e s e a r e very valuable securities. They stand u p with the Msgacmusetts securities i n value, and under our conditions i n the sixth district w e eannot agree to g o i n and buy them, because w e have got t o take care o f the credits f o r the district; whereas, Chicago n o doubt would like t o have those bonds i f they could b e legally bought. A t l e n t a would like t o have them. Mx. Fencher: H o w long have they been out? ir. MeCord A b o u t twanty o r thirty years. T h e sink- ing funds have been cleaned Up, a n d the State h a s not defaulted i n any debt since the Civil War. Mx. Wold: A r e these just general obligations o f the state? Mr. MeCora: J u s t general obligations o f the State. The Chairman: S u b d i v i s i o n B of Section 1 4 o f the would Federal Reserve Act, reading o n l y a portion o f it, suthorize the Federal Reserve Banks t o buy bills, notes, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 227 revenue bonds and warrants with a maturity from the date of purchase a n d n o t exceeding s i x months, i s s u e d i n anti- eipation o f the receipt o f assured revenues b y any State, Gounty, District, political subdivision o r municipality i n continental United States.” fhe language o f that subdivision does not include bondse 2 It might b e thet the state bonds that you refer to, Governor KeCord, would comply i n every respect i f they c a n be construed a s bilis, notes, revemje bonds o r warrants, pro- vided, o f course, the assured revenues t o which you refer fell within the previsions e f this subdivision B. W o u l d it be poraible for you t e submit the recomendetion that you went t e make with information i n regard t o that specific issue which would enable the board t o pass upon i t intelliw e would have toe make quite a n independ- gently? O t h e r w i s e , ent investigation t o see that they did comply with the statute. I f that were found t o b e the case, that a n opin- ion could b e given t o them upon whkeh t h e y could base a&modification o f the regniations u n d e r which these invest- menta are made, then we might b e i n a position t o purchase gome o f those bonds. Wr. MeCoré: M y reason for calling attention t o it, Mr. Chaixyman, w e s t o g e t a n e x p r e s s i o n f r o m t h e b o a r d a s to wnether that elass o f eecurities would b e classed under this section 14, I f se, i t would b e one o f the most desirable purchases t h a t a n y o f your banks could make. The Cheirman: M i g h t that n o t b e dealt w i t h b y first e h t would undoubtedly remaking e n i n v e s t i g a t i o n - - - w h i c hy https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 228 quire, anyway, a n d submitting i t with t h e recommendation So that 1 t would come from you with the information i n regard t o the statute, a n d s o on? Mr. MeCord: W e l l , I would have t o defer that until I could g o back hime and get that information, o r telegraph for it. i mean, I could not handle i t at this particular time, because I have not the information at my fingers’ ends. The Chairman. W h a t i s your pleasure a s t o our action? Mr. MeCord: I thought i f we might bring i t in anywhere in this discussion w e might get i t started; but I will. defer the matter until I can g o home and get the information and ask your ruling o n it. fhe Chairman: W o u l d it be satisfactory if this meeting passed a resolution requesting t h e Federal Reserve Board tO entertain a n application ‘from the Governors o f the Federal Reserve Bank o f Atlanta t o consider this specifie case when the information i s submitted, a n d possibly embody i t i n the tentative regulations? Mr. MeCord: Y e s . Mr. Seay: I apologize, lir . Chairman and gnetlemen, for being a R i k i Seehtvekiives D i d Governor MeCord Say that these bonds a r e t o b e paid back a t maturity? Mre MeCord: T h e y will b e paid i n cash a t maturity, out o f funds derived from a new loan. T h e legislature o f Georgis has provided for the sale o f new bonds. The Chairman: H a v e the new bonds been sold? Mr. MeCord: P a r t i a l l y sold, yes; n o t all. Mr. Keine: A n d y o u have a sinking fund? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. MeCord: Y e s . The Chairman: T h i s entire debt would b e mpk# paid. G o v e r n o r MeCord, were t h e y issued i n a& anticipation o f assured revenues? Mr. MeCord: T h e s e bonds? I could n o t s a y for t h e full amount; no. The Chairman: I Mr. MeCord: am afraid they would hedge o n that. T h e Constitution o f the State provides that t h e debt shall n i t increase under a n y circumstances; but, o n the other hand, since 1877, there i s a sinking fund of $100,000 a year t o be set aside for the bonds. The Chairman: W e had a n identical case, almost, i n New York, the case o f some Brooklyn bonds which were shortly to mature, a n d w e could n o t g e t them through, a n d w e put i t up t o our o w n counsel. H e stepped o n i t himself, a n d not the Federal Reserve Board. Mr. Seay: I would feel positively convinced t h a t that was a correct opinion. Mr. McCord: T h e r e i s n o trouble about t h a t point, about t h e bonds being sold i n open market. I am trging t o get something that would bring revenue t o some of these bankers. Mr. Aiken: i would like t o ask Mr. Curtis i f i n his judgment serial bonds would b e barred? sceretary: I think i t i s a much closer question other one. Aiken: “ e have talked that over a great deal i n were Bo@ton , and we believe that the bonds obviously not eligible; b u t the question was a n open o n e i n our minds, a s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to serial bonds, was o b e y *eial d a s to ° are convinced t h a t t h e y seconded, t h e Conference LOePrenpon 1915, a t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis