frsbog_mim_v27_0402.pdf

X-4999 OFFICE COEESSPOMDEl-TCr COPY Federal Reserve

Board Date November 1. 1927.

To Federal Reserve Board

From Mr. Wyatt - General Counsel

Subject: Acceptances Growing Out of Transactions Involving the Importation or asportat ion of Goods.

The attached report addressed to the Federal Reserve Board

under date of October 21, 1927, by the Sub-Committec of the General

Acceptance Committee reconsncnds that:

"That the Board revoke i t s previous rul ings to the e f f e c t that a b i l l cannot be e l i g i b l e for acceptance by a member bank or f o r rediscount or purchase by a Federal reserve bank as a b i l l growing out of the importation or exportation of goods i f i t i s accepted a f t e r the goods have reached the ir des t inat ion , and rule in l i e u thereof:

"That bankers acceptance may properly be considered as growing out of transactions involving the importation or exportation of goods when given for the purpose of f inancing the sa l e and d i s t r ibut ion on usual cred i t terms of imported or exported goods into the channels of trade, whether or not the b i l l s are accepted a f t e r the phys ica l importation or exportation has been completed."

In order for the Board to adopt th i s recommendation i t w i l l

be necessary for i t to reverse certain of i t s wel l e s tab l i shed rul ings

to the e f f e c t that a b i l l cannot be e l i g i b l e for acceptance by a member

bank or for rediscount or purchase by a Federal reserve bank as a b i l l

growing out of the importation or exportation of goods i f i t i s accepted

a f t e r the goods have reached their des t ina t ion . I am of the opinion,

however, that the language of the law i s broad enough to j u s t i f y a ru l -

ing such as that recommended in the attached report and that the Board

may l e g a l l y promulgate such a rul ing i f i t so d e s i r e s .

Be l i ev ing that a ru l ing such as that recommended in the a t -

tached report i s e n t i r e l y cons i s tent with the purposes of the Federal

Reserve Act and would be he lpfu l in the promotion of our fore ign trade,

GPIITI01T.

R E C O M M S H H A T I O I T .

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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I concur in the recommendation of the Sub-Committee of the General

Acceptance Committee, A proposed draft of a rul ing along the l i n e s

recommended "by the Committee i s r e s p e c t f u l l y submitted .herewith.

DISCUSSION.

The question whether the Board may properly make such a

rul ing depends upon the proper construction of the fol lowing provision

of Section 13 of the Federal Reserve Act:

"Any member bank may accept draf ts or b i l l s of exchange drawn upon i t * * * which grow out of transact ions in -volving the importation or exportation of goods."

This language i s very broad and i n d e f i n i t e and i s sus-

cept ib le of d i f f e r e n t construct ions. The Board has heretofore taken

the p o s i t i o n that Congress intended that the draf t s in question

should be drawn for the purpose of f inancing the importation or ex-

portat ion of goods, and on th i s theory i t has ruled that a b i l l

may not be considered e l i g i b l e for acceptance by a member bank or

for rediscount or purchase by a Federal reserve bank as a b i l l

growing out of the importation or exportation of goods i f i t i s ac-

cepted a f t e r the goods have reached their des t inat ion . I t was

argued that when the goods reach their des t inat ion the import or

export transact ion i s completed and i t s f inancing has n e c e s s a r i l y

been accomplished.

This p r i n c i p l e t however, was adopted by the Board at a

time when the acceptance business was new to American banks and

the Board was exerc is ing great care to r e s t r i c t i t within narrow

and very sa fe l i m i t s . In l a t er years the Board has broadened to some

extent i t s ru l ings regarding bankers1 acceptances and p a r t i c u l a r l y or exportation

those growing out of the importation/of goods, on the theory that


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the acceptance business has develoned to a po int where g r e a t e r " l a t i -

tude may s a f e l y "be permitted and the accenting banks may be given

a broader d i s c r e t i o n in determining the propriety of i s su ing bankers'

acceptances under varying circumstances. (See printed l e t t e r trans-

mitt ing Regulation A as amended March 29, 1922, page 433, April

1922 B u l l e t i n ) . The promulgation of a rul ing along the l i n e of

that recommended above would be a further appl icat ion of t h i s theory.

The theory heretofore followed by the Board that by accept-

ances "which grow out of transactions involving the importation or

exportation of goods" Congress meant acceptances drawn for the pur-

pose of f inancing the importation or exportation of goods i s en-

t i r e l y p l a u s i b l e and has the added weight of being the accepted

interpretat ion which the Board has placed upon th i s provis ion of

the Act for several years and was made the bas i s for several rul ings

on th i s subjec t .

The words "which grow out of transact ions involving the

importation or exportation of goods," however, are c l e a r l y suscept-

i b l e of a broader interpretat ion and in my opinion are broad enough

to include acceptances a r i s i n g out of transact ions involving imported

or exported goods a f t e r such goods reach the ir des t inat ion; provided

that there i s some reasonable connection between such transact ions

and the importation or exportation.

Thus, where an American exporter of cotton ships cotton to

Germany and s tores i t in h i s own warehouse in Germany and l a t e r s e l l s

i t from that warehouse to a German spinner, i t seems c lear that the sa l e

from the warehouse to the German spinner "grows orat of" the exportation

of cotton from the United States to Germany. The sale of the American


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cotton to the German spinner from the warehouse could not take

p lace i f the cotton had not f i r s t "been exported from the United

States and placed i n the warehouse. Moreover, i t i s but a con-

t inuation and consummtion of the export transact ion.

S imi lar ly , where an American importer "buys fore ign goods

and, a f t e r the ir arr iva l in the United S t a t e s , r e s e l l s them, i t

would seem that such resa le grows out of the importation of goods

within the "broad meaning of the Act, and that a draft drawn to

f inance such r e s a l e of the goods might properly "be sa id to grow

out of the importation of the goods.

On the other hand, i t would seem necessary to p lace

some r e s t r i c t i o n upon this interpretat ion; for otherwise i t might

"be argued that a l l dealings in imported or exported goods, no matter

how remote from the or ig inal importation or exportation, could "be

said to grow out of the importation or exportation and thus the

pr inc ip l e might "be reduced to an absurd!ty. I t was with th is

thought that the Committee recommended that th i s pr inc ip l e should

be r e s t r i c t e d to acceptances "given for the purpose of f inancing

the s a l e and d i s t r ibut ion on usual credit terms of imported or ex-

ported goods i n t o the channels of trade". This would seem to con-

f i n e the f inancing of the s a l e and d i s t r ibut ion of the goods in to

the channels of trade and would seem to e l iminate the carrying of

the goods for unusually long periods , the manufacture of the goods,

or the ir r e s a l e subsequent to manufacture.

In a ru l ing published on page 854 of the 1926 B u l l e t i n ,

, the Board reversed a rul ing published on page 610 of the B u l l e t i n

for June, 1920, to the e f f e c t that "no bank which has purchased

a foreign documentary draf t may refinance i t s e l f by drawing a draf t


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on a member "bank secured by the documentary draft" and ruled in

l i e u thereof that "such acceptances may be sa id to come within

the broad terms of the provis ions of s ec t ion 13 of the Federal Re-

serve Act which authorize member banks to accept draf t s drawn

upon them 'which grow out of transactions involving the importation

or exportation of goods1 . -provided that such draf t s are drawn be-

fore the underlying export transaction i s completed." In so rul ing,

the Board s t a t e d that i t had care fu l l y considered th is question

and was of the opinion that i t s previous rul ings on th i s subject

contained an unnecessari ly s t r i c t in terpretat ion of the law. This

in i t s e l f was a material broadening of the in terpretat ion which the

Board had previous ly placed upon th i s provis ion of the Act and was

a departure from the s t r i c t appl icat ion of the pr inc ip le that such

acceptances must be drawn for the purpose of f inancing the import

or export transact ion, s ince the import or export transaction had

been financed by means of a documentary draf t and the purpose of

the acceptance was merely to ref inance the bank which had purchased

the documentary dra f t . Before making that rul ing the Board had

the subject under consideration for many months and had been ad-

v i sed by t h i s o f f i c e that such a change in i t s rul ings would lead

to a change in i t s fundamental construction of that prov i s ion of

the Act which authorizes member banks to accept drafts drawn upon

them "which grow out of transactions involving the importation or

exportation of goods."- The Board, therefore , acted v i t h f u l l know-

ledge of the e f f e c t of t h i s act ion and c l ear ly intended to broaden

the s t r i c t in terpreta t ion which i t had theretofore placed upon th i s

provis ion of the Act., I t did not , however, abandon the p r i n c i p l e


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that in order for an acceptance to "be considered ozie which grotfs out

of a transaction involving the importation or exportation of goods

i t mast "be drawn before the underlying import or export transact ion

i s completed. On the contrary, i t ruled that , "national banks may

not l e g a l l y accept drafts drawn upon them "by other "banks against

the secur i ty of import or export b i l l s of exchange previous ly d i s -

counted by such other banks when such draf t s are drawn.after the

underlying import or export transactions are completed.11

To adopt the attached recommendation of the Committee on

Acceptances would be a further broadening of the Board's rul ings

on th i s subject , but in my opinion would be one which could be

much more e a s i l y j u s t i f i e d than the rul ing published on page 854 of

the 1926 B u l l e t i n . There a b i l l i s drawn for the purpose of f inancing

the s a l e and d i s t r ibut ion of imported or exported goods in to the

channels of trade, i t i s , in my opinion, much more c l e a r l y a b i l l

which grows out of a transaction involving the importation or exporta-

t ion of goods than i s a b i l l drawn by the bank against the secur i ty

of a documentary draft for the purpose of ref inancing the bank which

has purchased the documentary dra f t .

CONCLUSION1.

In my opinion, therefore , the law i s broad enough to justijjr

the Board in reversing i t s previous rul ings on th i s subject and pro-

mulgating the rul ing recommended in the attached report.

Among the published rul ings which would be reversed, in

whole or in par t , by the promulgation of such a new rul ing are the

fo l lowing:


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4 0 8

X-49S9

1915 B u l l e t i n , page 276

1917 B u l l e t i n , page 30

1918 B u l l e t i n , page 435

1921 B u l l e t i n , page 699

1924 B u l l e t i n , page 638

1926 B u l l e t i n , page 854

Respect fu l ly ,

Walter Wyatt, General Counsel.

WW MD OMC


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(proposed huli1tg- of f e d e r a l r e s e r v e board . )

Acceptances growing out of transactions involving the imoorta-tat ion or exportation of goods.

In a number of rulings published heretofore, the Federal Re-

serve Board has ruled in e f f e c t that a b i l l cannot be e l i g i b l e for

acceptance by a member bank or for rediscount or purchase by a

Federal reserve bank as a banker's acceptance growing out of the im-

portation or exportation of goods i f i t i s accepted a f t er the goods

have reached their dest inat ion.

After careful reconsideration of th i s question, the Board

i s of the opinion that such rulings contain an unnecessari ly s t r i c t

interpretat ion of that provision of the Federal Reserve Act which

authorizes member banks to accept drafts drawn upon them "which grow

out o f transactions involving the importation or exportation of goods"

and which authorizes Federal reserve banks to rediscount such ac-

ceptances . The Board i s no*? of the opinion that the broad language

of this provis ion of the Act i s c lear ly suscept ible of a more

l i b e r a l interpretat ion which v7ould f a c i l i t a t e the financing of our

foreign trade and part icu lar ly the sa le of American goods abroad

under circumstances similar to those described in the rul ing publish-

ed on page 638 of the Federal Reserve Bul l e t in for August, 1924.

The Board, therefore, rules that bankers' acceptances may

properly be considered as growing out of transactions involving the

importation or exportation of goods when drawn for the purpose of

f inancing the s a l e and d i s tr ibut ion on usual credit terms of imported

or exported goods into the channels of trade, whether or not the b i l l s


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are accepted a f t e r the phys ica l importation or exportation has been

completed.

A l l previous rul ings in c o n f l i c t with t h i s rul ing are

hereby reversed in so far as they c o n f l i c t with th i s ru l ing .

November 1, 1927.


i l l COPY X-4999-b

3spoht of

THE SUB-COMMITTEE OF THE GENERAL ACCEPTANCE

COMMITTEE TO THE FEDERAL EESEHVE BOARD

OCTOBER 21, 1937..

The Sub-Committee of the General Acceptance Committee held

a meeting in New York on October 21, a t which the fo l lowing were

present: Messrs. Zurlinden, Paddock, McKay and Wyatt, Mr. Kenzel

chairman, and Mr. O'Hara, secretary

Consideration was given to a proposal to recommend to the

Federal Reserve Board certain modif icat ions of i t s e x i s t i n g rul ings

with reference to acceptances growing out of the importation and ex-

portat ion of goods which w i l l make i t p o s s i b l e for .American banks to

accept b i l l s drawn upon them for the purpose of f inancing such trans-

act ions where i t i s necessary for such b i l l s to be drawn a f t e r the goods

have reached their des t ina t ion , in order to conform to usual commercial

and credi t p r a c t i c e s .

After f u l l d i scuss ion of the subject and consideration o f . a

statement of f a c t s re la ted by the Chairman s u b s t a n t i a l l y as expressed

in the accompanying memorandum i t was unanimously voted by the Committee

to recommend to the Board as fo l lows:

That the Board revoke i t s previous rul ings to the e f f e c t that

a b i l l cannot be e l i g i b l e for acceptance by a member bank or for r e d i s -

count or purchase by a Federal reserve bank as a b i l l growing out of the

importation or exportation of goods i f i t i s accepted a f t e r the goods

have reached the ir des t ina t ion , and rule i n l i e u thereof:

That bankers acceptance may properly be considered as growing

out of transactions involving the importation or exportation of goods

when given f o r the purpose of f inancing the sa l e and d i s t r i b u t i o n on


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usual cred i t terms of imported or exported goods in to the channels of

trade, whether or not the "bills are accepted a f t e r the phys ica l im-

portat ion or exportation has "been completed.


COPY 113 . X-4999-c

MEMORANDUM OF STAT3m2TT BY TES CHAIR..IAII OF THS SUB-OOXII TIES OF THS SSiJUILiL ^OCZPT.fCZ COIIilTT^ mDZ aT -a USTIHG OF THU CO:: IITTZC IS

EJ1 YORK Oil OCT. 31. 1927

The quest ion of the manner and extent to vzhich use of American acceptance cred i t vras hindered in competit ion vzith f o r e i g n cred i t in f inanc ing fore ign trade vras the subjec t of inquiry r e c e n t l y

- made "by the Federal Reserve Board of your Chairman.

On a v i s i t to Washington l a s t week, your Chairman explained to Governor Young and to the Federal Reserve Board tha t , according to h i s observat ions aai£. from information gained from interv iews with maiy bankers from England, Holland, Switzerland, Germany, France and I t a l y , the only p r a c t i c a l obs tac le s l a y in ru l ings of the Board which had the e f f e c t of proh ib i t ing b i l l s from being accepted a t a l l by nat ional banks or as e l i g i b l e by other banks and bankers a f t e r the p h y s i c a l exportat ion or importation of goods was completed.

He s t a t e d that these fore ign bankers had t o l d him that Indus try in the i n d u s t r i a l countries of the Continent had always had to look to f o r e i g n cred i t for the purchase of imported raw mater ia l s and i n the export of f i n i s h e d goods; that due to various causes , such c r e d i t was required for longer per iods than was customary i n the United S t a t e s . Among the causes named were lack of working c a p i t a l i n the American sense , 6low transporta t ion , the c l o s i n g of r i v e r navigat ion during the cold months, and the economic impract ic-a b i l i t y of i n d u s t r i e s c lo s ing down temporarily or f o r longer per iods , as i s f requent ly done in the United S t a t e s without ser ious economic consequences. The combined e f f e c t of these condi t ions requires manufacturers seasona l ly to carry raw mater ia l s for s i x months of operat ion and they, accordingly , require c r e d i t up to s i x months with re spec t to a considerable por t ion of the i r purchases .

The f a c t that banks on the Continent are much more c l o s e l y i d e n t i f i e d with the i n d u s t r i e s than i s the general case in America normally permitted them to d iscount f r e e l y for t h e i r manufacturing c l i e n t s and a l s o to procure for them from abroad the a d d i t i o n a l f ore ign cred i t that they required. England, Holland, Switzerland, and to some e x t e n t , France, were normally the cred i tor countries and the f i r s t three continue a t the present time to extend the kinds of c r e d i t s for the time required to the Continental i n d u s t r i e s ; g e n e r a l l y through the medium of Continental banks.

I t was explained tha t , owing to the higher p r i c e l e v e l s a t the present time as compared with pre-war, the volume of domestic b i l l s in Germany and other i n d u s t r i a l s e c t i o n s of the Continent rep-resented a p h y s i c a l volume of goods considerably l e s s , perhaps 75% of the quanti ty of goods, than would have been represented by an equal amount of b i l l s pre-war, and tha t , accordingly , the r i s e in the p r i c e l e v e l required r e l a t i v e l y greater recourse to fore ign c r e d i t than be-fore the war.


X-4999-c

I t was explained that both before and. s ince the war i t was the p r a c t i c e of London banks, and. bankers to extend commercial acceptance cred i t for the b e n e f i t of Continental industry and trade f r e e l y and that the r e s t r i c t i o n s in the American prac t i ce had doubt-l e s s caused a great deal of f inancing to go to London that otherwise would have come to New York on account of the a b i l i t y of America to create cred i t and the lower American discount r a t e s .

The cutt ing of acceptance commissions by London banks for Continental banks to a t trac t th i s kind of business to London was a l so referred to as cons t i tu t ing a substant ia l competition but one which would not be so serious i f American banks could g ive the credits that tho Continental trade requires on terms otherwise equal with London.

Since your Chairman advised the Board in these re spec t s , he has conferred with a considerable number of prominent New York bankers who create the large bulk of American acceptances to inquire of them what in the i r experience had prevented them from giv ing acceptance credi t s abroad such as London bankers hab i tua l ly grant, and he was informed by cach of them that the rule against accepting a f t e r goods had arrived in the country of import and the ru le against permitt ing customers to redraw a f t e r goods had arrived in the country of im-port were the only two po ints upon which they f e l t the ir d i s a b i l i t y depended.

They f e l t that they would not wish to extend cred i t s in Europe for purely domestic purposes, explaining that by that they meant the purchase of goods of domestic or ig in , the fabr ica t ion of such goods and i t s sa l e for domestic consumption within any European country, but that they did f e e l that they should be permitted to f inance through acceptance credi t s the sa le within European countries of goods of or ig in foreign to those countries , and the fabr ica t ion and sa le of goods for export. Many of them c i t e d the fami l iar problem of American cotton which i s now sent so l arge ly to European countries on consignment by American shippers and i s so ld to European spinners out of warehouses in Europe. Spinners require credit of ninety days or more. Under the present ru le s , American banks can g ive such credi ts where the cotton crosses a f r o n t i e r in Europe, that i s , where i t i s exported from one European country to another, but they cannot g ive such credi ts i f the cotton i s so ld to spinners located in the same European country i n which i t i s stored pending s a l e . A s imi lar negative p o s i t i o n ar i se s with respect to cotton which i s so ld and ship-ped from America on terms that have become quite "usual, i . e . , that at the buyer1 s option he may pay cash on arr iva l or g ive ninety days bankers cred i t . I t frequently happens that the cotton has arrived and so the phys ica l export completed before the buyer e l e c t s how- he s h a l l pay. If he e l e c t s to g ive ninety days bankers credi t the banker may not accept the b i l l i f the cotton has arrived at the fore ign des-t inat ion named in the shipping documents.


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The American "bankers consulted f e l t that the time has cer ta in ly arrived in the development of American acceptance business when American accepting "bankers should he permitted the free exerc ise of the ir d i s c r e t i o n within the law and regulat ions and t h a t , within those l i m i t s , f u l l l a t i t u d e should be granted them in the accommoda-t ion of business as i t i s done in foreign countries . They s t res sed p a r t i c u l a r l y the point that they regarded i t as preferable.: to - g ive a three months credi t with a renewal f o r a further period, i f i t were found that a renewal were required a t the expirat ion of the or ig ina l per iod, than to grant the credi t o r i g i n a l l y for a period of s i x months, and that i f the rule against accepting a b i l l a f t e r the goods had arrived were rescinded, the end sought would be p r a c t i c a l l y accomplished without a s p e c i f i c rul ing in favor of renewal b i l l s . I t was pointed out that from the bankers' po int of view i t was p r e f -erable to be able to review credi t s a t more frequent i n t e r v a l s than i s the case when credi t s up to s i x months are being i n s i s t e d upon by the borrower as a precaution against being unable to redraw at the end of a shorter period in case of need even for a small part of the cred i t .


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