to him that the word "eligible" by constant use in the regulations of the board had now acquired a definite fixed meaning which everybody interested in the matter knew, but this suggestion fell by the wayside. Toward the end of the arg"ment Hemphill made a plea that nothing at all be done on the ground that if the object of the Board was to kill it they had succeeded already, that the trust companies would guarantee it would not exceed fifty millions in any event, and that if it were killed any more they would have to report to their friends in France that this credit had been killed by the action of the Federal Reserve Board, which he thougnt would be an unfortunate situation. Somewhat to my surprise this plea seemed to have some effect upon the Board, who apparently said they would consider it further, but at 5:10 I left the meeting to catch the train home and don't know what happened after that except that Kent and Hemphill, who took the same train, seemed to be a little in doubt as to what shape the matter was in at the end of the conference.

Mr. Jay stayed over in Washington where he is to-day, but I have not heard anything further from him.

Since returning this morning I find a letter from the Federal Reserve Bank of Minneapolis, stating that their executive committee has concluded that the bank ought not to participate, directly or indirectly, in acceptances growing out of the French credit about which the Federal Reserve Board has communicated with all the Federal Reserve banks. We have not yet made any reply to Chicago or Minneapolis, thinking it would be better to wait until some decision has been reached.

The funny part, from my point of view, is that this credit is arranged along a line entirely similar to all the others which we have been buying for the last fifteen months. The record shows that the board had a copy of the original Brown credit for eight days before they published the revised regulations which permitted the purchase of acceptances of the character being made under the Brown credit, but each member of the baord thinks that he never saw the paper, and they are all firmly convinced they never knew that in any of these credits the acceptor was obligated in one form of words or another to supply the funds at the time of the original acceptance as well as at times of renewals.

At the conference yesterday, I thought Warburg made a very good speech on the theory of the acceptance business, in which he stated that he thought the practice of acceptors in this country of furnishing the money and holding their own bills was not the best way to have the acceptance business grow up in the United States, and he asked Kent if he thought that was the normal way to have the business conducted. On the other hand, I thought Kent's reply was also very good, in which he said that that way was as normal to-day as living to-day was, that the war had changed all forms of international relations, and that the development of the acceptance business in this country could not be done on the basis that it had been developed in England over a period of some hundreds of

years.

I am sorry that we have not had better success in this matter. The Lord knows we have struggled hard enough, but I don't think we have accomplished any thing. To my mind the credit is practically killed and probably cannot be revived with any semplance of unbroken life, and I don't think anybody is better off for it. My own view would be to write to Chicago and Minneapolis and ask them if they desire us to stop purchasing any French acceptances for them, on the basis that there is no distinction between the new ones and the old other than the fact that the new have industrial and manufacturing concerns as drawers whereas the old had bankers.

It is as astonishing fact that in all the conferences, debates, correspondence, and general mix-up that you had with the board in July, August and September of 1915 there does not appear to have been a specific reference to the fact that the participants in the Brown credit were obligated (i. e., they covenanted and guaranteed to have the acceptances discounted at the agreed rate) to furnish the money or see that the money was furnished.

EXHIBIT No. 3609

[Federal Reserve Board file]
[Copy]

At a special meeting of the Federal Reserve Board held in the office of the Board at 3:10 p. m. on Friday, October 27, 1916.

Present: Governor Harding, presiding; Mr. Williams; Mr. Warburg; Mr. Miller; Mr. Delano; Mr. Willis, secretary. There were also present, Messrs. Cotton and Elliott, of counsel for the Federal Reserve Board; Messrs. Jay and Curtis, of the Federal Reserve Bank of New York; Mr. Hemphill, of the Guaranty Trust Company; and Mr. Kent, of the Bankers' Trust Company.

The meeting was devoted to a discussion of statements contained in a circular relating to certain proposed acceptance credits to be opened in favor of French Industrial concerns, sent out by the Guaranty Trust and Bankers Trust Company to some 7,000 individual banks, etc.

Mr. Harding reviewed the steps taken by the Board during the week with reference to the French industrial credit, and indicated that the Board considered it desirable that there should be an additional announcement in order to make clear to member banks the position of the Board as to purchase or discount. He presented to Messrs. Hemphill and Kent a statement agreed upon by the Board as a suggestion from him to be adopted by the syndicate in charge of the French industrial credit, and transmitted by them to the same persons to whom their original announcement relative to the proposed credit had been transmitted. The statement in question was as follows:

"Our circular of

* * was issued, of course, without consultation

with the Federal Reserve Board. Since its issue we have consulted with the Board. We understand that, as a matter of policy, and quite apart from any question of 'eligibility', the Board holds the view that acceptances drawn under so-called 'renewal credits' of this character cannot be considered as possessed of that intrinsically liquid or self-liquidating character which would justify the Federal Reserve banks in materially extending their present investments in such paper. We deem it our duty, therefore, to advise you of this before definitely accepting your application for a participation." Mr. Hemphill replied briefly to the Governor's statement, and Mr. Kent outlined the history of the acceptance credits of the past year which had been negotiated upon a basis similar to that proposed for the new credit. He further discussed the practice of foreign and particularly of English banks with reference to the buying and selling of bankers' acceptances.

Mr. Delano, who was obliged to withdraw from the meeting, stated briefly that he was in accord with the position of the Board as announced by the Governor, and while not desirous of interfering with or crippling foreign trade in any way, he did desire to have all operations and paper growing out of them sound and well understood in their nature. Mr. Miller expressed his views as being in harmony with those laid down by the Governor. Mr. Warburg outlined the character of the acceptance as viewed by the Board, and warned against the unduly sudden development of a so-called acceptance business, which really amounted to long-term credits. Messrs. Hemphill and Kent having stated that the circular issued by the syndicate managers had contained the absolutely true statement in connection with the assertion that the acceptances provided for were eligible at Federal Reserve banks, Mr. Williams called their attention to the fact that thus far the Board had made no expression or commitment of any kind as to whether it considered these acceptances eligible or not. Mr. Hemphill offered a plea for the leaving of matters in statu quo without the issuance of any statement by the Board or by the syndicate managers. He urged that enough has already been done to accomplish the Board's purpose in calling attention to the fact, that thus far subscriptions to the credit have amounted to only about $18.000.000 and undertaking that if the Board would agree to leave matters as they stood, he would see to it that no subscriptions in excess of $20,000,000 were accepted save from the Guaranty Trust Company and the Bankers Trust Company, affiliated firms and institutions, which might undertake to bring the total subscriptions up to $50,000,000, stopping at that point.

At 5:15 p. m. Messrs. Hemphill and Kent withdrew, it being understood that the matter should be left in abeyance until Monday morning at 10:30.

The Board engaged in a general discussion of policy with respect to the acceptance situation, but at 5:45 p. m., no conclusion having been reached, adjournment was, on motion, voted.

$3876-37-pt. 31-5

EXHIBIT No. 3610

NOVEMBER 1ST, 1916. DEAR MR. CURTIS: Yours of the 28th reporting in detail on the French credit matter has just reached me. I am very sorry my original telegram was garbled in transmission. It struck me from the inquiries you sent that neither you nor Jay could have read over the previous memoranda and correspondence in detail before going to Washington, as that contained answers to a number of the questions asked.

Two things stand out in this whole matter. One is that Kent and his associates acted hastily in putting those two paragraphs in the confidential circular, and the other that the Board acted with equal haste and inadvisedly in sending out the telegram they did to the Reserve agents. Between the two, the whole thing apparently has been botched.

Warburg's arguments, as you repeat them, might be all well enough in normal times and besides that his argument that bills should be drawn in such a way that they can be driven home when money rates advance here won't hold water. Relief is afforded to the money market, which is under pressure to some extent because the drawing of finance bills becomes unprofitable and is deferred, but principally because floating capital moves to the market where high rates prevail and is invested there in bills, thus reducing interest rates. If we have a broad discount market and the bankers of the world are willing to trust us to pay our debts in gold, relief from high rates will be afforded to our market by having foreign bankers send their money here to invest in just such bills as these French bills. Kent is right in saying that what we are doing today to finance our present trade is normal under present conditions, because the trade is abnormal and the means to finance it must be abnormal. In other words, abnormal things have become normal.

I am sure you are mistaken in saying that the guarantee of discount feature of the Brown credit was never discussed with the Board and think a careful examination of my correspondence with Warburg and all the official correspondence with the Board, etc., will disclose that this was all covered and understood. You will, I think, find that the discussion of this feature of the credit resulted in that curious phrase in Hamlin's letter in which the Board ruled that section 5200 of the Revised Statutes would only apply in case the drawers of the bills failed to meet them at maturity and the commercial credit become in fact a debt of the drawer to the acceptor. Do not hesitate to look through my personal files if you think it worth while to see what I wrote Warburg on the subject and what he wrote me. Miss Parker will know where to find the letters.

I agree with Warburg that the practice which has developed in this country by which acceptors hold their own bills is a bad one in normal times. I would like to see them market all of these bills. We made every effort to have that done in both the Brown and Bonbright credits. As to the Board's having no knowledge of the guarantee of discount, I cannot swallow that for a minute. That agreement was in their hands and we have every reason to believe from the correspondence that it was very carefully studied, at least, by Mr. Warburg and probably by the others.

Thank you very much for your letter. I am sorry the affair proved a fiasco. Again let me suggest that we should make every effort to retain the gold purchased from Morgan, in bars if that can be done without incurring assay office charges. We will find it of value to have gold bars later on.

Best regards to all of you.

Very sincerely yours,

DEAR STRONG: I received today your letter of October 2 nd, about the French credits, and I was very much interested to read your views. I am particularly glad to have them because I am frank to say that it was not easy for me to deal

with this matter according to my own conscience, surmising from the telegram that you sent to your New York associates that you were not quite in sympathy with what we were doing. I am glad to see from your letter that we are not so far apart as I was afraid we might be. You have meanwhile received my letter. I am confident that if you had been in New York and seen the thing coming, and we had exchanged views in time, a good deal of trouble might have been Avoided.

Some of the difficulties arise from the fact that we have not been willing, as You correctly say, to look into these credits but simply deal with them by general gulations. Unfortunately, the fact that the two banking institutions stated in her circular that this paper would be eligible for rediscount with the Federal Reserve banks and sent the circular to four thousand banks, forced our hand; ari we had to take some notice.

The matter has been fairly satisfactorily settled. Kent and Hemphill were here on Saturday. The latter made a fool of himself while Kent impressed me being very sincere and serious in his aims. He and I had quite a discussion for the Board about what acceptances ought to be and what they ought not be, and I believe that I gave him a new light. I shall be very happy to see again and discuss this matter further with him. I only wish that he had come before. They told us that their applications had shrunk from $100,000,000 to $20,000,000 and that they had applications for only $18,000,000, and that bably they would make up the rest themselves so that the topmost they could der the French-if that much-would be $50,000,000. In view of the fact that as far as outsiders were concerned there were not more than $20,000,000, we aily decided today not to force them to revise their statement by sending a ond circular, nor to make a public statement ourselves. Harding is going to Saver a speech Wednesday at New York and will make a very general statement about acceptances without mentioning any names, and he will fully explain what we think is right and what we think is wrong. You will find what he says about acceptances on pages nine to nineteen.

I am frank to say that I never realized before that there was a definite agreement in all these credits on the part of the acceptor to carry his own drafts at a given rate. As we are now informed, substantially the same stipulations existed in the other French credits. About those later credits we never received any information except, a few weeks ago, at my request we received a synopsis which hd not mention this phase of the arrangements at all. It is clear to me, as I wrote you the other day, that a definite agreement on the part of an acceptor to provide money for eighteen months at 6%% renders the acceptance a subterfuge for the mere purpose of the possible accommodation given to the acceptor for his benefit. The drawer is not interested any more at all in the entire acceptance manipulation.

Of course, there was a strong tendency in the Board to go to the other extreme now and declare these acceptances as "ineligible." I took the view that that would be over-doing it entirely-that renewals in themselves were legitimate, provided they took the proper form, but that as a matter of policy the banks should protect themselves and the market from an over-dose of such renewals and from an abuse of the acceptance facilities. That view finally prevailed. On the whole, I am glad to say, there was complete unanimity on the part of the members of the Board in dealing with this matter.

It may interest you to know that both Boston and Philadelphia had advised eir member banks that they should not expect that the banks would hold the ag for these acceptances-even before the Board had sent its telegram; and Chicago's view you can best judge from the fact that they overreached themselves to the extent of declaring these acceptances ineligible for open market operations, A point of view from which we shall have to make them retract. Other Federal Reserve banks expressed themse ves at once as in entire harmony with our views And I believe that Jay, also, is now in full accord with what we want to achieve even though I believe at times he was afraid that the "big stick" would be swung too energetically. Though at some times it looked that way, this has been avoided, and I think the matter has been handled and settled in the best possible

manner.

It is necessary, however, that the banks protect themselves, and I am rather lined to think that it would be advisable to treat unendorsed finance drafts of this nature on a basis a little less advantageous than the regular commercial paper. I think a rate one-fourth per cent higher will at this time be sufficient,

just as an indication of the policy of the banks, and it would then permit us, whenever it should become necessary, to discriminate more or less.

Governor, Federal Reserve Bank, New York, N. Y.

MY DEAR SIR: Receipt is acknowledged of your letter of January 29th, in which you ask for a statement of the Board's policy in dealing with acceptances drawn under credits extending over a period of one or two years. After a very full discussion of the matter, the Board has decided to authorize this expression of its views in accordance with the principles outlined in the memorandum attached hereto. The banks of New York may, during a period which can be declared ended at any time, proceed upon the basis of this memorandum in accordance with your letter of January 23rd. The essential principles may be summed up as follows:

(1) Acceptance credits opened for periods in excess of ninety days should only, in exceptional cases, extend over a period of more than one year, and in no case for a time exceeding two years.

(2) Banks which are members of groups opening these credits, should not buy their own acceptances, and where an agreement is made with the drawer for purchase of acceptances for future delivery, the rate should not be fixed one, but should be based upon the rate ruling at the time of the sale.

(3) Transactions covered by these credits should be of a legitimate commercial nature, and acceptances must be eligible according to the rules and regulations of the Board.

(4) Whenever syndicates are formed for the purpose of granting acceptance credits for more than moderate amounts, Federal Reserve banks should be consulted with regard to the transaction. The question of eligibility, both from the standpoint of the character of the bill and of the amount involved, will be passed upon by the Federal Reserve bank subject to the approval, in each case, of the Federal Reserve Board.

As stated in the memorandum, the Board will rely upon the fair spirit of cooperation on the part of the New York banks, but it must be understood in passing upon these transactions that not only quality but also quantity must be the controlling factors. The aggregate of these acceptances should not be permitted to constitute the greater proportion of outstanding acceptances at any time, and it must be understood that while the Federal Reserve banks and the Federal Reserve Board might look with favor upon a transaction as long as the total amount involved is not excessive, transactions of exactly the same character may be ruled out whenever the aggregate amount of outstanding acceptances of this character becomes, in the opinion of the Federal Reserve Board, unduly large.

You are authorized to communicate the contents of this letter to the accepting banks of your district, and the Board will advise the other Federal Reserve banks of the policy which has been agreed upon.

Very truly yours,

(Signed) W. P. G. HARDING, Governor.

MEMORANDUM

In dealing with the question of acceptances, it is desirable that the Board should not be obliged to adopt inflexible regulations unless absolutely necessary. It should be borne in mind that we are competing in the acceptance field with other countries which have no legal restrictions in which sound business judgment, guided from time to time, by the central banks of these countries, constitutes the unwritten, but none the less rigid law. The banks of the United States would greatly assist the Board in its work of developing a modern and efficient system of American bankers acceptances-and they would best serve their own