Commercial Paper and the Federal Reserve Board
| Author | Eugene E. Agger |
| DOI | 10.1177/000271621606300110 |
| Published date | 01 January 1916 |
| Date | 01 January 1916 |
| Subject Matter | Articles |
105
COMMERCIAL
PAPER
AND
THE
FEDERAL
RESERVE
BOARD
BY
EUGENE
E.
AGGER,
Columbia
University,
New
York
City.
In
the
reform
of
our
banking
system
provided
in
the
Federal
Reserve
Act
it
was
recognized
that
an
achievement
greatly
to
be
desired
was
the
establishment
of
an
open
discount
market.
For
the
domestic
situation
such
a
market
was
regarded
as
essential’to
the
free
flow
of
banking
credits
from
section
to
section.
Internationally
an
open
market
to
which
the
foreign
banker
might
be
attracted
was
looked
upon
as
a
means
of
helping
to
safeguard
the
national
reserves.
Furthermore
there
was
unquestionably
a
general
feeling
that
to
an
excessive
degree
our
banking
resources
had
been
directed
toward
investment
and
speculation
rather
than
toward
commercial
ends,
and
it
was
believed
to
be
desirable
to
correct,
if
possible,
any
excessive
tendency
of
this
kind.
Hence,
while
the
Federal
Reserve
Act
attempts
to
provide
for
the
kind
of
commercial
paper
that
would
meet
the
needs
of
a
good
discount
market,
it
essays
at
the
same
time
to
exclude
from
such
market
the
kind
of
paper
that
is
held
to
be
undesirable.
Section
13
of
the
act
provides
for
the
rediscount
at
the
Federal
reserve
banks,
upon
the
endorsement
of
any
of
its
member
banks,
of
&dquo;notes,
drafts
and
bills
of
exchange
arising
out
of
actual
commercial
transactions,&dquo;
but
it
is
left
for
the
Federal
Reserve
Board
to
deter-
mine
the
character
of
the
paper
thus
available
for
discount.
There
is
express
provision,
however,
for
the
acceptance
for
discount
of
paper
based
on
&dquo;staple
agricultural
products
or
other
goods,
wares
or
merchandise,&dquo;
and
there
is
similarly
an
express
rejection
of
bills &dquo; covering
merely
investments
or
issued
or
drawn
for
the
pur-
pose
of
carrying
or
trading
in
stocks,
bonds,&dquo;
etc.,
except
securities
issued
by
the
government
of
the
United
States.
The
maturity
of
bills
acceptable
for
discount
is
also
limited
to
ninety
days
although
special
provision
is
made
for
six
months’
agricultural
and
live
stock
paper.
Furthermore,
specific
provision
is
made
for
the
development
of
acceptances
in
the
field
of
exports
and
imports.
106
although
even
in
that
field
limits
are
imposed
on
the
amounts
that
a
member
bank
may
accept
for
individuals,
firms,
etc.
and
that
it
may
accept
in
toto,
while
limits
are
similarly
imposed
on
the
reserve
banks
themselves
in
their
dealings
with
member
banks.
The
orig-
inal
acceptances
by
member
banks
may
be
of
a
maturity
up
to
six
months,
but
the
rediscounts
at
the
reserve
banks
are
limited
to
three
months’
maturity.
Finally,
in
section
14
the
act
provides
that &dquo;any
federal
reserve
bank
may
under
rules
and
regulations
prescribed
by
the
Federal
Reserve
Board
&dquo; purchase
and
sell
in
the
open
market
from
or
to
anybody &dquo;cable
transfers
and
bankers’
acceptances
and
bills
of
exchange&dquo;
of
the
kinds
and
maturities
made
eligible
for
rediscount &dquo;with
or
without
the
indorsement
of
a
member
bank.&dquo;
In
other
words,
as
a
basis
of
the
projected
discount
market,
the
act
provides
for
three
kinds
of
paper
as
follows:
(a)
Commercial
paper,
namely &dquo;notes,
drafts
and
bills
of
exchange
arising
out
of
actual
commercial
transactions,&dquo;
that
is
paper &dquo;issued
or
drawn
for
agricultural,
industrial
or
commercial
purposes,
or
the
proceeds
of
which
have
been
used
or
are
to
be
used
for
such
purposes&dquo;;
(b)
commodity
paper,
namely
paper
secured
by
&dquo;staple
agricultural
products
or
other
goods,
wares
or
merchandise&dquo;;
and,
lastly
(c)
acceptances
growing
out
of
exports
and
of
imports.
But
while
the
act
itself
imposes
certain
requirements
on
the
paper
eligible
for
rediscount
at,
or
for
purchase
by,
the
federal
reserve
banks,
it
im-
poses
on
the
Federal
Reserve
Board
the
responsibility
of
determining
in
detail
the
character
of
such
paper.
In
view
of
the
peculiar
development
of
American
credit
methods
in
the
past,
there
arose,
after
the
passage
of
the
Federal
Reserve
Act,
the
liveliest
discussion
as
to
the
manner
in
which
the
Reserve
Board
should
exercise
the
responsibility
thus
entrusted
to
it.
Owing
to
the
specific
provisions
of
the
act
there
was
no
serious
difference
of
opinion
about
commodity
paper
and
about
acceptances
growing
out
of
exports
and
imports.
But
with
respect
to
the &dquo;notes,
drafts,
and
bills
of
exchange
arising
out
of
actual
commercial
transactions&dquo;
the
discussion
waxed
warm.
The
issue
was
drawn
between
what
is
known
as
&dquo;single-name
paper&dquo;
and
what
on
the
other
hand
is
known
as
&dquo;double-name
paper.&dquo;
There
is
no
occa-
sion
in
this
place
for
referring
to
the
sundry
interesting
represen-
tations
made
by
both
sides.
Suffice
it
to
say
that
the
question
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