New-York tribune., 1914-11-12
CAUTION ADVISED
BY RESERVE BOARD
Discount Policy Defined
for New Bank System,
Starting Monday.
NO LIMIT PUT ON
SHORT TIME PAPER
Statement Points Out Object Of
Act IS To Stimulate Com.
nlercial Business.

From The Tribune Bureaul
Washington. Nov. fl. Asserting that
the functions Of the Federal Reserve
banks. which are to open on Monday,
are 20 extend credit facilities where
the abnormal conditions now prevail
lng have created emergencies on the
one hand and tho protection of gold
holdings in this country on the other,
the Federal Reserve Board to-day made
public its definition of commercial pa
per. The board. however, advises eau
tion IN the extension Of credit faclli-
ties because, 10 says, "it would appear
advisable TO proceed with caution in
districts not in need Of immediate re
LIEF and TO await the effect Of the re-
lease of reserves and Of the changes
which the credit mechanism Of the
country Is about 90 experience before
establishing a definite discount pol
icy"
Because OF the requirements of the
present situation the board deems il
inadvisablc at this time to place mar
row or restricted Interpretation upon
the character of paper eligible for dis
count II has, therefore, refrained
rom discussing the question of single
or doi) bic name paper, but has decided
20 admit both forms Of bills or rcdls-
count with Federal Reserve banks.
The board says at the outset that no
bill shall bee admitted 20 rediscount by
Federal Reserve banks the proceeds OF
which have been or are to be applied
TO permanent investment, and that the
object Of the act is 70 stimulate busl-
ness by the rediscOunting OF CONNER
cial paper preferably with not more
than ninety days 10 run. No limit has
been placed on the amount or these
short time bills, the board, however
recommending that the reserve banks
should be in a position TO hquldate.
If necessary, substantially one-third OF
their investments within thirty days
The board has fixed the limit on SIX
months paper at % per cent OF the
capital. but this may be increased from
time TO time upon request Of the banks
20 the Reserve Board.
Short Time Obligations.
In defining commercial paper the tol-
lowing basic principles have been lald
down for the guidance of the reserve
and member banks: ,.u
"Maturities of discounted bills
should be well distributed. IL is the
well established practice Of European
reserve banks 10 invest only IN oOllga-
tions maturing within short time IL
is a general rule not to purchase paper
having more than ninety days TO run.
The maturities of these notes and blll5
are so well distributed as 20 enable
those banks within a short time 20
strengthen their hold on the general
money market by collecting maturity
or by renvciting at higher rate
very substantial proportion OF their as
sets. Acting on this principle, the req
eral Reserve banks should be IN po-
sition 20 liquiGate whenever such a
course is necessary substantially one
thirl of all their investments within a
period Of thirty days. Departure from
this principle viii endanger the safety
of the system. II Is observance OF this
principle that aiTorls justification for
permitting member banks 20 count bal
ances with Federal Reserve banks as
the equivalent of casn reserves.
Bills should be essentially sell
liquidating. ,.u
safety requires not only that bills
held by the Federal Reserve banks
should be OF short and well distributed
maturities, but. In addition, should be
of such character that It rs reasonably
certain that they can be collected when
they mature They ought to be essen
TALLY 'self-liquidating, or IN other
words, should represent in every case
some distinct step or stage m me pro
ductive or dstributive process the pro
gresson Of goods from producer 10 CON
sumer. The more nearly these steps ap-
proach the final consumer the smaller
will be the amount involved IN each
transaction as represented by the bill,
and the more automatically self-llqui-
dating will be its character.
No Loaning for Speculation.
"Double-name paper drawn on a pur-
chaser against an actual sale OF goods
affords. from the economic point Of
view, prima facie evidence of the char
acter of the transaction from which
il arose. Single notes, now so
freely used in the United States, may
represent the same kind Of transactions
as those bearing two names. lnasmuch,
however. as the single-name paper does
not show on its face the character Of
the transaction out of which it arose
an admitted weakness of this form Of
paper it is incumbent upon each Fed
eral Reserve bank to insist that the
character of the business and the gen.
eral status Of the concern supplying
such paper should be carefully exam
ined in order that the discounting bank
may be certain that no such single
name paper has been issued for pur-
poses excluded by the act, such as in
vestments of permanent or specula-
tive nature. Only careful inquiry on
these points will render it safe and
proper for "a Federal Reserve bank to
consider such paper 'self-liquidatlng'
investment at maturity.
at is not thought necessary 10 i'm
pose upon the banks the observance Of
methods which would involve needless
difficulty or delay. It is, therefore, not
deemed essential that a statement Of
condition be attached to each bill when
sold 20 Federal Reserve bank. It is,
however, thought advisable by the
board TO require that on and after
January 10, 1915, no paper shall be dis
counted or purchased by Federal Re
serve hanks that does not bear on its