South Bend news-times. (South Bend, Ind.) 1913-1938, 1919-08-03
By LOUIS LUDLOW.

WASHINGTON. Aug. What isl
the attitude Of the federal reserve
banks toward the commercial paper
Of automobile dealers?
There has been a great deal of
confusion and misunderstanding on
this point which happily, is cleared
up by the federal reserve board it
self in q way that is highly pleasing
10 the automobile dealers.
The federal reserve bank OF St
Louis at first shed much light upon
this confusing question. In answer
to an inquiry from the National Au-
t6mobile Dealers association this
bank points out that reserve banks
consider the automobile dealers
note equally as good as that of any
other commercial house, basing its
acceptance, as might be expected.
upon the financial standing and
credit OF the dealer himself. How
ever. a distinction is made between
dealers and finance or credit COM
panies. and herein lies the cause for
most Of the misunderstanding that
has existed in the past
More Light on Subject.
The federal reserve board, in "A
bulletin, sheds further light on the
subject and brings out clearly the
point referred to- 1t says that the
federal reserve act authorizes any
federal reserve bank TO discount a
note or bill drawn for an agricul-
tural. industrial or commercial pur-
pose; that is, a note or bill the pro-
ceeds Of which have been used or
are to be used for such a purpose.
This stressing of the essentially
commercial character of a note that
is 10 be accepted at "a reserve bank
sas emphasized by congress when
the amendment to the federal re-
serve act was passed expressly au-
thorizing federal reserve banks to
discount the note OF a member bank
when secured by eligible paper. "A
the amendment was specifically
limited TO notes of member banks it
cannot be construed TO authorize the
rediscOunting Of notes of any sort
of financial institutions
What Really Happens.
With the automobile dealer the
case is quite different. as the reserve
bank does not concern itself directly
with the dealers paper. When the
dealer sells a car on time, he takes
a note or notes for the balance of the
purchase price due, securing this
note or notes by a mortgage on the
car and protecting himself with in
surance on the car in his favor as
his interests may appear. The deal
er then takes the purchasers notes
to his bank for discounting. first en-
dorsing them. The bank, as a mem
ber may. if II so wishes, go TO the
federal reserve bank with it's own
paper. depositing the note turned in
by the dealer as collateral.
This means, then, that the reserve
bank is under no risk. as It is af-
fOrded a four-ply, ecurity-first
the paper Of the member bank; sec
ond. the security of the member
bank as a guarantee OF the custom
er's note; third, the Endorsement OF
the dealer on the customers note;
fourth, a lien upon the car itself.
No Risk Involved.
Even should the bank hold the
dealers paper and not rediscount il
at a reserve bank, 1t runs practical
~ no risk. In the first place. the
dealer always investigates the credit
and security Of the purchaser and
does not sell TO a man of uncertain
standing. Then. again. the bank
knows whether the dealer is a good
risk or not from it's own investiga-
tons or previous dealings. The note