velop foreign markets on behalf of domestic shippers, making arrange. ments for the delivery and disposal of their goods and in general providing them with a variety of services abroad which they were not in position to perform for themselves without an elaborate organization and which could hardly be asked of an ordinary commercial bank. Through service charges fixed for the purpose of compensating the corporations for the work they did and through fairly high rates of interest charged for advances of a slightly risky and long-term nature, it was believed that the enterprises could get a very satisfactory line of business. In order to enable them to do so, the Federal Reserve Board made their acceptances eligible at reserve banks when within the permitted maturities and in other ways attempted to favor the development of the concerns. This has proven largely ineffectual, so that the few concerns which were formed under this interpretation of the Act have retired from business or become inactive. There may be some revival of them in the future but thus far they appear to have been an unnecessary and rather useless type of organization. Nothing, however, prevents them from being organized whenever there is business to be had and the Board's regulations, therefore, still possess a general interest with regard to the whole subject which may at any time become more vital.

In a general way the action of the Board with respect to these concerns has covered practically the following ground:

Kinds. Any corporation may accept (1) drafts and bills of exchange drawn upon it which grow out of transactions involving the importation or exportation of goods, and (2) drafts and bills of exchange which are drawn by banks or bankers located in foreign countries or dependencies or insular possessions of the United States for the purpose of furnishing dollar exchange as required by the usages of trade in such countries, dependencies, and possessions, provided, however, that, except with the approval of the Federal Reserve Board and subject to such limitations as it may prescribe, no corporation shall exercise its power to accept drafts or bills of exchange if at the time such drafts or bills are presented for acceptance it has outstanding any debentures, bonds, notes, or other such obligations issued by it.

Maturity. Except with the approval of the Federal Reserve Board, no corporation shall accept any draft or bill of exchange which grows out of a transaction involving the importation or exportation of goods with a maturity in excess of six months, or shall accept any draft or bill of exchange drawn for the purpose of furnishing dollar exchange with a maturity in excess of three months.

Limitations.-(1) Individual drawers: No acceptances shall be made for the account of any one drawer in an amount aggregating at any time in excess of 10 per cent of the subscribed capital and surplus of the corporation, unless the transaction be fully secured or represents an exportation or importation of commodities and is guaranteed by a bank or banker of undoubted solvency. (2) Aggregates: Whenever the aggregate of acceptances outstanding at any

time (a) exceeds the amount of the subscribed capital and surplus, 50 per cent of all the acceptances in excess of the amount shall be fully secured; or (b) exceeds twice the amount of the subscribed capital and surplus, all the acceptances outstanding in excess of such amount shall be fully secured. (The corporation shall elect whichever requirement (a) or (b) calls for the smaller amount of secured acceptances.) In no event shall any corporation have outstanding at any one time acceptances drawn for the purpose of furnishing dollar exchange in an amount aggregating more than 50 per cent of its subscribed capital and surplus.

Reserves. Against all acceptances outstanding which mature in 30 days or less a reserve of at least 15 per cent shall be maintained; and against all acceptances outstanding which mature in more than 30 days a reserve of at least 3 per cent shall be maintained. Reserves against acceptances must be in liquid assets of any or all of the following kinds: (1) cash; (2) balances with other banks; (3) bankers' acceptances; and (4) such securities as the Federal Reserve Board may from time to time permit.

CHAPTER XIX

FINANCING FOREIGN TRADE

IN the matter of financing technique, as distinct from provision of banking facilities, recent years have seen a great development. Prior to the Federal Reserve Act, American foreign trade was financed in large measure through London, while the permission granted therein to national banks to accept, the subsequent expansion of American trade and extension of financial assistance abroad, and the derangement of foreign currencies incident to the war, ushered in a new era. The principal developments may be reviewed as follows:

1. The Federal Reserve Board has considered carefully conditions governing admission to reserve banks of paper arising, not merely from exclusively foreign transactions to which the United States was a party, but also those in which a more remote connection is observed.

2. The Board has also devoted much attention to an effort to develop acceptance practice as applied to foreign operations, both of importation and exportation.

3. Bankers, feeling the bad effects of confusion and lack of uniformity arising out of different policies with respect to the financing of movements of goods, have undertaken to bring about, through voluntary agreement, the creation of a uniform set of foreign trade documents and, while their success in this regard has been somewhat limited, the work done has at least resulted in producing a recognition of points of difference in practice and an effort to safeguard foreign commercial papers and documents, in particular where there was danger of confusion or uncertainty.

General Provisions

The Federal Reserve Act was very specific in its statement that the reserve banks were to hold themselves ready to assist foreign trade. In practice, this assistance to foreign trade has been reduced to a question of the character of paper growing out of certain types of transactions, and thus necessitated a careful definition of the term "foreign trade." Very early in its career, the Board defined foreign trade as including not only the movement of goods between the United States and foreign countries, but also the movement of goods between such

other countries themselves. Thus it became possible, for example, for a reserve bank to discount paper designed to facilitate the movement of coffee between Brazil and Germany at the instance of, say, a firm of Hamburg importers. The System also determined to treat the movement of goods between the United States and its colonial possessions as included within the term "foreign trade." Thus was afforded a fairly broad definition of the idea of foreign trade and of the operations growing out of it, from the geographical standpoint at least.

From the time standpoint, the question also required considerable definition. Very early in the history of the System, the question arose as to whether paper designed to furnish funds to be used in the production of goods destined for foreign trade could be considered admissible to discount. This question passed through various stages of discussion and action, the final result, however, being to render eligible obligations made for the purpose of producing, shipping, and storing commodities which were the outgrowth of an order or contract, and

XFavors For trac

hence were expected to enter into foreign trade, as well as those which 3340

had in fact already formed the subject of actual shipment and commerce. This point of view or interpretation was applied both with respect to goods leaving the United States and those moving toward it, including those which were the subject of manufacture in foreign countries from which they were later to be exported to the United States. In the matter of ownership, also, interpretation has been generous. The rulings of the Federal Reserve Board have authorized admission to discount of paper drawn by the producer or shipper upon the foreign buyer, as well as paper drawn by foreigners upon American buyers either before or after shipment, while in some cases bankers have been allowed to substitute their own obligations for such direct commercial paper. In form, the paper has been allowed to assume shape either as bankers' acceptances, straight commercial bills, singlename notes-in fact, practically any shape which the parties to the transaction chose to give to it, provided, of course, that its connection with foreign trade was fairly established.

As already seen, the Federal Reserve Act specified the kind of paper which Federal reserve banks might purchase or discount were they to establish agencies abroad. Yet, as noted, these banks have never established any such agencies or actively entered the foreign paper market. The Reserve Act itself, it should be noted, has nothing to say on the question whether the paper discounted by member banks on behalf of foreigners or foreign transactions, or taken by the foreign branches of such member banks, is subject to any other or different interpretation as compared with that applying to eligible paper originating in domestic transactions within the continental United States. It is, of

not dow

course, obvious that foreign business transactions are of a kind and give rise to classes of paper, which differ materially from those originating in the United States, and hence it has been necessary for the Board to develop a policy with regard to them which could be regarded as based on the general principles of Federal reserve administration. One such outstanding question has been with reference to the character of the paper developed abroad. This, as is well known, is more likely to be two-name paper than is the case in the United States. Under the rulings of the Board, there is nothing to prevent the discounting of such two-name paper through the parent office of the bank in practically unlimited quantities with Federal reserve banks subject to the same general requirements which obtain in the case of domestic two-name paper. The practice that some branches have developed of merely originating the business which is then encouraged to take the form of drafts drawn upon the parent office and accepted by the latter has been regarded as satisfactory. In some sugar-producing countries application has been made to branches of national banks for loans based on the security of growing sugar crops and the Board has ruled that such loans may be made without being subject to the limitations of section 24 of the Act which apply to loans upon real estate. The provisions of section 5200, Revised Statutes, as regards loans to one interest do, however, apply and must be observed.1 Nevertheless, the requirements cited establish a very liberal construction with respect to foreign operations and, with the exception of the necessary handicaps due to distance, put the business originating at foreign branches of member banks in a position which, if anything, is rather more favorable than that of business originating in the United States. Letters of Credit and Acceptances

By far the greater part of the Board's attention, however, has been devoted to acceptances and, to a lesser extent, the letters of credit and acceptance agreements under which they are created. While employed to some extent in domestic operations, these instruments have had by far their principal employment in the field of foreign trade. Much of the effort has required adaptation of the considerable body of precedent which has grown up abroad, to the needs of the American situation. In part the same general principles apply as were indicated in chapter XV, dealing with the domestic bankers' acceptance, but a number of special problems are also involved.

Fundamentally a study of the attitude of any foreign banking organization toward foreign transactions ought to begin with analysis of its position with regard to the issue of letters of credit and of bills 11919 Bulletin, p. 362; Digest, XXV, 105, p. 97.