frsbog_mim_v13_1081.pdf
Transcript of frsbog_mim_v13_1081.pdf
7/17/2019 frsbog_mim_v13_1081.pdf
http://slidepdf.com/reader/full/frsbogmimv131081pdf 1/3
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.
7/17/2019 frsbog_mim_v13_1081.pdf
http://slidepdf.com/reader/full/frsbogmimv131081pdf 2/3
- 2 -
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.
7/17/2019 frsbog_mim_v13_1081.pdf
http://slidepdf.com/reader/full/frsbogmimv131081pdf 3/3
• 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.