Burlington weekly free press. [volume] (Burlington, Vt.) 1866-1928, 1915-02-25

gold reserves of the country in the fed
eral reserve banks makes available n
basis for credit which was impossible
when the gold OF the nation was boarded
in 1900 banks, each necessarily taking
counsel of its fears in time of stress, be-
cause of the absence of any centralized
banking organization on which II could
depend for relief: and finally a very elas-
tic currency is created by the federal re-
serve notes.
The federal reserve banks arc organized
very much on the lines of the other great
reserve banks of the world, and are essen
TALLY banks of rediscount for the com
mercial banks of tho country, occupying
In relation to the commercial banks of
the district in which the federal reserve
bank is located somewhat the relation
that the Bank of England occupies to the
Joint stock banks of Great Britain, insur-
ing It's member banks, rs the Bank of
England does TO the Joint stock banks, n
resource ALVIN VS. available, and at known
terms the opportunity for the conversion
OF It's assets immobile In it's vaults into
credit or cash, as the immediate needs
may demand.
Any such banking plan as is contem-
plated by the federal reserve act is new
to this country, and must. of necessity, be
worked out slowly, as it is much better
for us to possess our souls with some pa
tience and avoid mistakes than to pro-
coed in too much haste and repent at leis-
ure for too hasty actions which would be
difIicult. to undo.
Heretofore, m times of stress our banks
have been obliged to practically stop ex-
tending credit to their customers TO 81
very considerable extent, resulting In
great hardship to many merchants and
manufa cturers entitled to credit, and
reaching down through them to the hum
dreds of thousands of employees and their
families, whose Incomes were reduced
because of the inability of their employ
ers to obtain the necessary credit to con-
tinue their business on a normal scale.
This curtailment was necessary because
Of the fact tina although the bankers
held In their pocketbooks a large part of
their assets in notes that We're perfectly
good, yet they were unable to l%ipuidate
those notes and obtain resources for the
normal extension of credit. Under the
federal reserve act notes that arc really
toiiitc paper, VIZ i''i )O
merclal transactions. can Immediately be
converted with the federal reserve banks,
and the commercial banks of the country
be in a position to extend credit as the
commercial needs Of their community
may require.
one of the first questions with which
the federal reserve board was confronted
at the opening of the federal reserve
l-.i-. MO- ~ z.., i;l, 5000. - ,to~l
ard commercial paper which could be
properly and safely rediscounted by the
reserve banks. Obviously, the paper
must be short, because the very essence
Of any reserve bank Is that it's assets
shall be of the most liquid character; and
also obviously the notes acceptable for
rediscount should be notes that We're given
IN connection with an operation of trade
which resulted In the ultimate CONVEX
sion Of the goods which were bought or
manufactured by the original proceeds Of
the loan. so that in the natural course of
business, this conversion would result in
the borrower having funds In hand to
meet his obligations at maturity, this be-
ing what Is so often referred to as self
liquidating paper"
Mr.. Aiken efin commercial paper
according to Federal Reserve banks
regulations as follows: 1t must, in the
first place, be endorsed by the member
bank. 1t must. in the second place. have
not more than 80 days to run to
maturity. But let me explain here that
this does not mean that paper must
have not more than 90 days to run
from its date to maturity. The note
may be at six months or more, but since
1t has then 80 days or less to its maturity
date, II will be available for rediscount
with the Federal Reserve Bank. Thirdly,
III must be real commercial paper, and
the best definition hat I have ever seen
OF what constitutes commercial paper
Is in the terms of this circular. as fol-
lows: 1T is paper the proceeds of which
are to be used in producing, purchasing,
carrying or marketing goods in one or
more OF the steps of the process Of pro-
d~uGtlon, manufacture and distribution;
as DISTINGUISHED from paper the proceeds
OF which are for permanent investment,
and which did not contemplate the con-
version of its Investment into cash dur
Ing the life of the note or notes given
to finance the transaction.
The application for rediscount which
must accompany the note carries with
1t a statement from the rediscounting
bank that, in its Judgment. the paper
offered is eligible under the terms of the
act. a special provision was made to
make available the ordinary small bust
ness notes held by many of the banks
In the smaller communities, by n regula-
ton that notes up to 5000, where that
amount was not in excess of ten per
cent. of the capital of the bank, and
whore it was in amount not to exceed
ten per cent. of the capital, might be
available for rediscount merely on the
statement of the rediscounting bank
that this paper. in their Judgment, was
really business paper. For the redis-
count of notes in excess of this amount,
II seems only proper that banks should
nave In their files a signed statement
OF the resources and liabilities of the
borrower.
Before leaving this matter Of redis-
counts | want to impress upon you once