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1 0 c

E x

  OFFICIO MEMBERS

  F .  HOUSTON,

SECRETARY  OF THE  TREASURY

CHAIRMAN

COMPTROLLER

  OF THE

  CURRENCY

E S S R E P L Y

  T O

FEDER L RESERVE BO RD

F E D E R L R E S E R V E B O R D

W SHINGTON

: 8 i

W . P . G .  HARDING. GOVERNOR

EDMUND PLATT.VICE GOVERNOR

ADOLPH

  C .

  MILLER

C H A R L E S  S .  HAMLIN  *

HENRY  A .  MOEHLENPAH

  <

W . T .  CHAPMAN. SECRETARY

R . G .  EMERSON. ASSISTANT SECRETARY

W . M .  IMLAY. FISCAL AGENT

November 24,1920,

X-2071

Su bj ec t: Ag ri cu lt ur al Implement Paper,

Dear  S i r :

The  Federal Reserve Board receives from time  t o  t ime inquir ies

with reference  t o t h e  e l i g i b i l i t y  f o r  rediscount  by  Federal Reserve Banks

of

  paper a r i s ing

  out of the

  purchase

  of

  agricultural implements

  and

  farm

machinery  of  various kinds.  I n  view  of  these inqui r ies  t h e  Board  h a s  made

t h e  fol lowing rul ing:

Def in i t i on  of  Eligible Commercial  an d  Agricultural Paper

The  regula t ions  of the  Federal Reserve Board define eligible commercial

and  agr icu l tur a l paper  a s  notes , dr af t s  o r  b i l l s  of  exchange which have been

issued  or  drawn,  o r t h e  proceeds  of  which have been used  or a re t o be  used

i n t h e  f i r s t i n s t ance  i n  producing, purchasing, car ryin g,  o r  marketing goods

(including goods, wares, merchandise  6r  ag ric ul tur al products , including

live stock)

  in one or

  more

  of the

  steps

  of the

  process

  of

  production, manu-

fac ture  o r  d i s t r i b u t i o n .  If a  note, dra f t ,  o r  b i l l  of  exchange  h a s  been

issued  o r  drawn,  o r t h e  proceeds have been  or a re to be  used,  f o r a n  a g r i -

cultural purpose, that note, draft ,

  or

  b i l l

  of

  exchange

  may be

  e l i g i b l e

  f o r

rediscount

  i f i t has a

  maturity

  a t t h e

  time

  of

  rediscount

  of not

  more than

s i x  months exclusive  of  days  of  grace.  On th e  other hand,  i f a  note, draf t ,

o r  b i l l  of  exchange  h a s  been issued  or  drawn,  o r t h e  proceeds have been  or

a r e t o b e  used,  f o r a  commercial purpose,  i t  wi l l  not be  e l i g i b l e  f o r r e -

discount  i f i t has a  maturity  a t t h e  time  of  rediscount  i n  excess  of  ninety

days exclusive  of  days  of  grace.  The  Board's regulations further provide

tha t  no  note, d ra f t ,  o r  b i l l  of  exchange  i s  e l i g i b l e  f o r  rediscount  i f the

proceeds have been  o r a r e t o b e  used  f o r  permanent  or  fixed investments  of

any

  kind, such

  a s

  land , bu ild in gs , f ixe d machinery,

  o r f o r an y

  other capital

purpose.  A  copy  of the  Federal Reserve Board's re gu la ti on s, Ser ies  of 19^0,

i s  enclosed, herewith, Regulation  A of  which deals with  t h e  subject  of the

e l i g i b i l i t y

  of

  paper

  f o r

  rediscount

  by

  Federal Reserve Banks.

Two  general c l ass es  of  El ig ib le Agr icul tura l  an d  Commercial

Paper.

I t  w i l l  be  observed that there  a r e tw o  general classes  of  e l i g ib l e

a g r i c u l t u r a l  a n d  commercial paper,  (1 )  paper which  i s  eligible because

issued  o r  drawn  f o r a n  a g r i c u l t u r a l  or  commercial purpose,  and (2 )  paper

which  i s  el igible because  t h e  proceeds have been  o r a r e t o b e  used  f o r a n

a g r i c u l t u r a l

  o r

  commercial purpose.

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x-2071  1 0 8 2

Notes given  i n  payment  f o r  Articles Purchased.

Since

  t h e

  purchase

  an d

  sale

  of

  goods

  of any

  character

  i s a

  commercial

t ransact ion from  t h e  standpoint  of the  s e l l e r ,  a  note  of a  buyer given  t o

t h e  sel ler inpayment  f o r  ar t ic les purchased  i s a  note which  h a s  been

issued  o r  drawn f o r a  commercial pu rp os e. Such  a  note  may,  there fo re ,

be

  e l i g i b l e

  f o r

  red iscount i r respect ive

  of

  whether

  o r n o t t h e

  a r t i c l e s

purchased will constitute

  a

  permanent

  o r

  fixed investment

  i n t h e

  hands

of the  ulti mat e produ cer . This  i s  true whether  t h e  buyer  i s a  dea le r ,  p u r -

chas ing a r t i c l es  f o r  r e - s a l e ,  or i s a  farmer purchasing art icles  f o r h i s

own use .

Notes

  t h e

  Proceeds

  of

  which

  a r e

  used

  t o

  Purchase Articles.

I f a  note  i s n o t  issued  or  drawn f o r a  commercial  o r  ag r i cu l t u r a l

purpose,  i t s  e l i g i b i l i t y  o r  i n e l i g i b i l i t y  f o r  rediscount must  be  determined

by the  purpose  f o r  which  t h e  proceeds have been  or a r e to be  used.  The

use of

  proceeds

  t o

  purchase goods

  f o r

  r e - s a l e

  i s a

  commercial purpose even

though

  t h e

  a r t i c l e s

  a r e o f

  such

  a

  character that they must

  be

  considered

permanent investments  i n t h e  hands  of  those  who  ultimately purchased them.

Consequently  t h e  note  of a  dealer discounted  by h im a t h i s  local bank  t o

provide funds  t o  purchase ar t ic les  f o r  r e - s a l e  may be  e l i g i b l e  f o r  r e d i s -

count  a s  commercial paper irrespective  of the  character  of  such a r t i c l es .

A

 note

  of a

  farmer, however, discounted

  by h im a t h i s

  local bank

  t o

  provide

funds with which  t o  purchase ar t ic les  f o r  agr icu l tural uses  i s  e l i g i b l e  o r

i n e l i g i b l e  f o r  rediscount according  t o t h e  character  of  such a r t i c l e s .  The

farmer 's note  i s  i n e l i g i b l e  f o r  rediscount  i f t h e  a r t i c l e s  a r e i n t h e  nature

of a  permanent  o r  fixed investment,  but on th e  other hand  i f  they  a r e  a r t i c l e s

which

  a r e f o r

  ag r i cu l t u ra l u ses

  and

  which have

  to be

  replaced from time

  t o

,

  time

  t h e

  far mer 's note

  may be

  e l i g i b l e

  f o r

  rediscount

  a s

  agr icu l tural i . paper .

Ar t i c l e s  i n t h e  Nature  of  Permanent  or  Fixed Investments.

Whether  or no t  g iven a r t i c l es  a r e i n t h e  nature  of  permanent  o r  fixed

investments  a s  that term  i s  us»d  i n t h e  Board 's regulat ions,  i s a  question

which depends upon  t h e  circumstances  i n  each pa rt ic ul ar case.  The  Board

h a s

  ruled that farm to ols , a gr ic ul tu ra l implements

  and

  machinery,

  and

  other

farm operating equipment  do no t  constitute permanent  o r  fixed investments

when they  a r e o f  such  a  character that they have  to be  replaced within  a

comparatively short time,  so  tha t  i t may be  assumed that  a  farmer will have

t o  spend  a  certain amount  of  money annually  and  regular ly  f o r t h e  purchase  and

replacement

  of

  equipment

  of

  this kind

  ( F . R .

  Bu l l e t in ,

  F e b .

  1916,

  page

  67 .

So  a l so ,  t h e  Board  h a s  speci f ical ly ru led that  a  t ractor , l ike horses  and

mules, bought  f o r  farm work  and  purchased with several yeari

1

  use in  view,

does  n o t  cons t i tu t e  a  permanent  or  fixed investment,  and  tha t  a  note,  the

proceeds  of  which  a r e  used  t o p a y f o r  such  a  t r a c t o r ,  aay be  e l i g i b l e ag r i -

cu l tural paper .  ( F . R .  Bu l l e t in ,  Apr .  19I8,  page 309)•  On th e  other hand,

t h e  Board  h a s  ruled that  a  s i l o  i s a  permanent  o r  fixed investment  and  that

a  note  t h e  proceeds  of  which have been used  t o  bui ld  a  s i l o  i s n o t  e l ig ib le

ag r i cu l tu ra l paper .  ( F . R .  Bul le t in ,  Oc t . 1918 ,  page  %1), The  Board  h a s

also ruled, upon  t h e  bas i s  of the  f a c t s  i n t h e  pa r t ic u l ar case, that  a n

el ec t r ic sys tem furn ish i ng l i gh t

  a n d

  power

  f o r a n

  individual farm

  i s i n

t h e

  nature

  of a

  permanent

  o r

  fixed investment within

  t h e

  meaning

  of t he

Board 's regulat ions.

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•  x.207i  1 0 8 3

< >

Distinction between Agricultural paper  and  Commercial Paper

The  purchase  and  sa le  of any  a r t i c l e s  or  commodities including agri-

cultural products

  i s a

  commercial rather than

  a n

  ag r i cu l t u ra l t r an sa c t io n .

Consequently

  t h e

  note

  of a

  dealer, whether

  i t i s

  given

  i n

  payment

  f o r

a r t i c l e s  or  commodities purchased  f o r  r e - s a l e  or i s  discounted  by the

dealer

  a t h i s

  bank

  t o

  provide funds with which

  t o

  purchase such articles

o r

  commodities,

  can be

  e l i g i b l e

  f o r

  rediscount only

  a s

  commercial paper,

even though  t h e  a r t i c l e s  o r  commodities will  be  used  by the  u l t imate  p u r -

chasers  f o r  ag ri cu lt ur al purposes. Such  a  note  can be  e l i g i b l e  f o r  r e d i s -

count, t he r ef or e , only when

  i t h a s a

  maturity

  a t t h e

  time

  of

  rediscount

of not  more than ninety days.  The  note  of a  farmer, however, given  i n

payment  f o r  a r t i c l e s  or  commodities purchased,  may be  considered agricultural

paper which

  i s

  e l i g i b l e

  f o r

  rediscount when

  i t h a s a

  maturi ty

  a t t h e

  time

of  rediscount  of not  exceeding  s i x  months, provided that  t h e  a r t i c l e s  or

commodities purchased  a r e t o b e  used  by the  farmer  f o r  agricultural purposes

a n d a r e n o t i n t h e

  nature

  of

  permanent

  o r

  fixed investments.

  So

  also ,

  of

course,

  t h e

  note

  of a

  farmer, discounted

  by h im a t h i s

  local bank

  f o r t h e

purpose

  of

  providing funds

  t o

  purchase such a r t i c l e s

  o r

  commodities,

  may be

e l i g i b l e  f o r  rediscount  a s  agricultural paper when  i t ha s a  maturi ty  a t t h e

time  of  rediscount  of not  mora than  s i x  months. Since  t h e  purchase  and

sa le

  of

  agr icu l tu ra l p roducts

  is , a

  commercial rather than

  a n

  a g r i c u l t u r a l

t r an sac t io n ,  a  note given  t o a  farmer  i n  payment  f o r  agr icu l tu ra l p roducts

grown  by him  cannot  be  e l i g i b l e  f o r  rediscount  a s  agr icu l tu ra l paper ,  but

nay be  e l i g i b l e  a s  commercial paper  i f i t ha s a  maturi ty  a t t h e  time  of

rediscount

  of not

  more than ninety days.

Same principles apply  t o  Draf t s  a s t o  Notes.  .

I n t h e

  foregoing statements

  and

  discussions

  of

  hypothetical cases where

payment

  f o r

  goods purchased

  i s

  made

  by the

  buyer giving

  t o t h e

  s e l l e r

  a

negotiable instrument representing  t h e  buyer 's obligat ions,  i t h a s  been

assumed  f o r t h e  sake  of  brevity that  t h e  negotiable instrument would  be a

note  of the  buyer.  As a  matter  of  f a c t ,  i n  such cases  t h e  buyer  may  ei ther

make

  h i s own

  note

  o r

  accept

  a

  draft drawn

  on him by the

  s e l l e r .

  In

  ei ther

case, however,  t h e  same pr in ci pl es wil l apply  i n  determining whether  t h e

instrument representing  t h e  buyer 's obligat ion  i s  commercial paper, which

cannot  be  rediscounted  i f i t ha s a  maturity  i n  excess  of  ninety days,  o r

agricultural paper, which

  may be

  rediscounted with

  a

  maturi ty

  n o t i n

  excess

of s ix  months.

Ho

  Obligat ion

  t o

  Rediscount Paper even though Eligible.

I t  should  be  understood,  of  co urs e, t ha t even though  a  b i l l  or  note

nay  tech n ica l ly  be  e l i g i b l e  f o r  rediscount ,  a  Federal Reserve Bank  i s  under

no  o b l ig a t io n  t o  rediscount  i t , b u t may  accept  i t o r  r e f u s e  i t i n t h e

exerc ise

  o f i t s

  discretionary power.

Yours very truly,

Governor.

To  Governors  and  Federal Reserve Agents.