(b) Acceptances must have been made by a member bank, non-member bank, trust company, or by some private banking firm, person, company, or corporation engaged in the business of accepting or discounting. Such acceptances will hereafter be referred to as "bankers, " acceptances.

(c) A banker's (foreign) acceptance must be drawn by a purchaser or seller or other person, firm, company, or corporation directly connected with the importation or exportation of the goods involved in the transaction in which the acceptance originated, or by a "banker." The bill must not be renewed after the goods have been surrendered to the purchaser or consignee, except for such reasonable period as may have been agreed upon at the time of the opening of the credit as a condition incidental to the importation or exportation involved, provided that the bill must not contain or be subject to any condition whereby the holder thereof is obligated to renew the same at maturity.

(d) A banker's (foreign) acceptance must bear on its face or be accompanied by evidence in form satisfactory to a Federal Reserve Bank that it originated in, or is based upon, a transaction or transactions involving the importation or exportation of goods. Such evidence may consist of a certificate on or accompanying the acceptance to the following effect:

"This acceptance is based upon a transaction involving the importation or exportation of goods. Reference No. Name of acceptor

-."

(e) Bankers' acceptances, other than those of member banks, shall be eligible only after the acceptors shall have agreed in writing to furnish to the Federal Reserve Banks of their respective districts, upon request, information concerning the nature of the transactions against which acceptances (certified or bearing evidence under IV (d) hereof) have been made.

(f) A bill of exchange accepted by a "banker" may be considered as drawn in good faith against "actually existing values," under II (c) hereof, when the acceptor is secured by a lien on or by transfer of title to the goods to be transported or by other adequate security.

(g) Except in so far as they may be drawn in good faith against actually existing values, as under (f), the bills of any one drawer drawn on and accepted by any firm, person, company, or corporation (other than a bank or trust company) engaged in the business of discounting and accepting, and discounted by a Federal Reserve Bank, shall at no time exceed in the aggregate a sum equal to a definite percentage of the paid-in capital of such Federal Reserve Bank; such percentage to be fixed from time to time by the Federal Reserve Board.

(h) The aggregate of acceptances of any firm, person, company, or corporation (other than a bank or trust company) engaged in the business of discounting or accepting, discounted or purchased by a Federal Reserve Bank, shall at no time exceed a sum equal to a definite percentage of the

paid-in capital of such Federal Reserve Bank; such percentage to be fixed from time to time by the Federal Reserve Board.

To be eligible for purchase by Federal Reserve Banks under section 14, bankers' acceptances must comply with all requirements and be subject to all limitations hereinbefore stated, except that they need not be indorsed by a member bank: Provided, however, That no Federal Reserve Bank shall purchase the acceptance of a "banker" other than a member bank which does not bear the indorsement of a member bank, unless a Federal Reserve Bank has first secured a satisfactory statement of the financial condition of the acceptor in form to be approved by the Federal Reserve Board.

V. POLICY AS TO PURCHASES

While it would appear impracticable to fix a maximum sum or percentage up to which Federal Reserve Banks may invest in bankers' acceptances, both under section 13 and section 14, it will be necessary to watch carefully the aggregate amount to be held from time to time. In framing their policy with respect to transactions in acceptances, Federal Reserve Banks will have to consider, not only the local demands to be expected from their own members, but also requirements to be met in other districts. The plan to be followed must in each case adapt itself to the constantly varying needs of the country.

VI. ACCEPTANCE BY MEMBER BANKS

Any member bank may accept drafts or bills of exchange drawn upon it, having not more than six months' sight to run and growing out of transactions involving the importation or exportation of goods up to an amount not exceeding the capital and surplus of such bank, provided that—

1. Every such bank shall possess an unimpaired surplus of not less than 20 per cent of its paid-in capital.

2. Every such bank shall file formal application with the Federal Reserve Bank of its district, which shall report to the Federal Reserve Board upon the standing of such applicant, stating also whether the business and banking conditions prevailing in the district warrant the granting of such applications in said district.

3. Every such application shall first have been approved by the Federal Reserve Board.

Approval of any such application may be rescinded, and modifications of this regulation may be made, by the Federal Reserve Board upon notice of 90 days to the bank or banks thereby affected.

154. DOMESTIC ACCEPTANCES PROVIDED FOR1

The appended regulation is intended to cover the purchase in the open market, not only of bankers' acceptances based on the importa

Adapted from Federal Reserve Board Circular No. 19, November 29, 1915. Paragraph numbering has been changed in attempting to avoid duplications in Circulars Nos. 18 and 19. See selection No. 153.—EDITOR.

tion or exportation of goods, heretofore covered by Regulation R, but also the purchase of certain domestic acceptances authorized by certain State laws.

The Federal Reserve Board has determined that bankers' domestic acceptances, as defined and restricted in the appended regulation, are a very useful type of paper, and the Board has not felt justified, therefore, when admitting State banks and trust companies into the Federal Reserve System, in stipulating that such domestic acceptances should not be continued under reasonable limitations as a part of their business.

Inasmuch as the making of these domestic acceptances has been recognized by the Board as the exercise of a legitimate banking function when authorized by law, it was thought that they are of the character to make desirable investments for Federal Reserve Banks. The Board has, therefore, issued the appended regulation, not only embodying the authority given in Regulation R, series of 1915, to purchase bankers' acceptances based on the importation or exportation of goods, but also authorizing the purchase of bankers' domestic acceptances within the limits prescribed in the appended regulations.

1. A banker's domestic acceptance must be based on a transaction covering the shipment of goods, such transaction to be evidenced at the time of acceptance by accompanying shipping documents, or must be secured by a warehouse receipt covering readily marketable staples and issued by a warehouse independent of the borrower, or by the pledge of goods actually sold.

2. A banker's domestic acceptance must bear on its face or be accompanied by evidence in form satisfactory to the Federal Reserve Bank that it is based on a transaction or is secured by a receipt or pledge. Such evidence may consist of a certificate in general form similar to that suggested in (d) Circular No. 18, governing foreign acceptances.1

3. Provision (e) in Circular No. 18 is also made applicable to domestic acceptances.

4. The following provisions supersede (g) and (h) in Circular No. 18: a) The aggregate of bills, domestic and foreign, of any one drawer, drawn on and accepted by any bank or trust company and purchased or discounted by a Federal Reserve Bank, shall at no time exceed 10 per cent of the unimpaired capital and surplus of such bank or trust company, but this restriction shall not apply to the purchase or discount of bills drawn in good faith against actually existing values; that is, bills the acceptor of which is secured by a lien on or by a transfer of title to the goods to be transported, or by other adequate security, such as a warehouse receipt, or the pledge of goods actually sold.

1 For the provisions of Circular No. 18, see selection No. 153.-EDITOR.

b) The aggregate of bills, domestic and foreign, of any one drawer, drawn on and accepted by any firm, person, company, or corporation (other than a bank or trust company) engaged in the business of discounting or accepting, and purchased or discounted by a Federal Reserve Bank, shall at no time exceed a sum equal to a definite percentage of the paid-in capital of such Federal Reserve Bank, such percentage to be fixed from time to time by the Federal Reserve Board; but this restriction shall not apply to the purchase or discount of bills drawn in good faith against actually existing values; that is, bills the acceptor of which is secured by a lien on or by a transfer of title to the goods to be transported or by other adequate security, such as a warehouse receipt, or the pledge of goods actually sold.

c) The aggregate of bankers' acceptances, domestic and foreign, made by any one firm, person, company, or corporation (other than a bank or trust company) engaged in the business of discounting or accepting, purchased or discounted by a Federal Reserve Bank, shall at no time exceed a sum equal to a definite percentage of the paid-in capital of such Federal Reserve Bank; such percentage to be fixed from time to time by the Federal Reserve Board.

No Federal Reserve Bank shall purchase a domestic or foreign acceptance of a "banker" other than a member bank which does not bear the indorsement of a member bank, unless there is furnished a satisfactory statement of the financial condition of the acceptor in form to be approved by the Federal Reserve Board.

POLICY AS TO PURCHASES

Federal Reserve Banks should bear in mind that preference should be given wherever possible to acceptances indorsed by a member bank, discounted under section 13, not only because of the additional protection that such indorsement affords, but also because of the reason that acceptances discounted under section 13 may be used as collateral security for the issue of Federal Reserve notes.

155. FEDERAL RESERVE BANKS AND THE FOREIGN

EXCHANGES

BY E. E. AGGER

Important provisions are to be noted in connection with the foreign exchanges and the international movements of gold. Most of the foreign trade of the United States has heretofore been financed by foreign bankers. The new system permits the home institutions to enter the field for this business. Member banks are allowed

Adapted from "The Federal Reserve System," Political Science Quarterly, XXIX (1914), 279–81.

within certain limits to accept on commission drafts and bills of exchange growing out of exports and imports, and these may be sold in the open market or ultimately rediscounted at the federal reserve banks. National banks with a capital and surplus of $1,000,000 or more may, with the permission of the Federal Reserve Board, establish branches abroad. Similarly the reserve banks, when duly authorized, may open accounts in foreign countries and may establish branches for purchasing, selling, and collecting bills of exchange bearing at least two names and maturing within ninety days. But the extent to which American bankers will be able to supplant the foreigner will depend, of course, largely upon the acceptability of bills drawn in dollars. This will depend, among other things, upon the market rate of discount in the United States in competition with the rates abroad. If the new system successfully establishes American credit in the world markets, a large part of the tribute that American commerce now pays to foreign bankers will stay at home.

The provisions bearing on the foreign exchanges and gold movements are of special interest. In addition to the dealings with their member banks, the reserve banks are permitted to purchase and sell in the open market, at home and abroad, cable transfers of funds, bankers' acceptances, and bills of exchange of the kind that are eligible for rediscount, with or without the indorsements of a member bank. Furthermore, they may deal in gold coin and bullion, at home and abroad, may make loans thereon, may exchange federal reserve notes for gold in bullion and in coin, or for gold certificates, and they may contract for loans of gold. Finally, under rules prescribed by the Federal Reserve Board, they may buy and sell, at home and abroad, United States bonds, and notes, bills, bonds, revenue warrants, etc., of the stated and minor political divisions.

The significance of these provisions can hardly be overestimated. Taken together, they mean that in the foreign exchange market the reserve banks will not only become competitors of existing banks but also that they are likely to become the controlling factors in that market. In normal times, owing to their extensive resources and wide powers, they will markedly influence the general drift of the exchanges, while in times of strain they ought to be in position to render most helpful aid. Their buying of bills in the open market will enable them to support the demand side when rates are low, and

'Subsequent rulings of the Federal Reserve Board have greatly strengthened the acceptance features of the law. See selections Nos. 153 and 154.-EDITOR.