In some sections of the country interest rates fluctuate widely at different seasons of the year in accordance with the demand for and the supply of loanable funds.1 For instance, in the fall of the year when the grain crops of the West must be moved, the demand for funds exceeds the supply at the local banks. After a few months the money expended for moving the crops flows back to these banks and they have a surplus of loanable funds. High money rates, therefore, are likely to prevail in the West and South during the fall months and low rates in the spring and summer. The dealer in commercial paper can take advantage of these fluctuations, buying paper bearing a high interest rate and selling it where the interest rate is lower.

But, it may be asked, why does a business firm sell its paper to a note broker rather than to its bank? Several inducements may be offered by the dealer in commercial paper. By selling commercial paper to the dealer, a firm may keep its borrowing credit at the bank in reserve in case of emergency. Then, again, the firm may want to borrow a larger amount than its bank would care to handle. The note broker has facilities for distributing the loan among many banks. Generally, banks require a borrower to maintain a balance of at least 20 per cent of his loans. He has actual use, then, of only $80 out of every $100 borrowed from the bank, which means that a 5 per cent loan actually costs the borrower over 6 per cent. By selling to the dealer he gets the full face value of the loan less the dealer's commission.

The purchase of commercial paper is advantageous to the banks as well as to business borrowers. It affords an outlet for the profitable investment of funds not needed to meet the demands of regular customers. The country banks especially are large buyers of commercial paper. These banks, as already noted, keep part of their required reserve with banks in the reserve cities, and often accumu1 One of the objects of the Federal reserve system is to reduce these fluctuations and to stabilize interest rates.

late large balances at those seasons when the local demand for loans is light. Now the big city banks pay only about 2 per cent on these balances, whereas the rate for commercial paper may be 5 or 6 per cent. When the country bank accumulates a good balance it may instruct its New York correspondent to buy, say, $20,000 or $100,000 worth of commercial paper with the money the country bank has on deposit. Instead of keeping large balances with their city correspondents the country banks have tended in recent years to deal directly with the note brokers, though they frequently seek the advice of the big city banks as to the credit and standing of the firms whose paper is offered to them.

Another advantage to the banker of buying commercial paper is that on such loans there will be no request for renewal. Many of the bank's regular customers expect to renew their notes again and again and they become chronic borrowers. But in the case of commercial paper there is usually no thought of renewal; borrowers make it a point to protect their commercial paper at maturity, even if someone else has to go unpaid, for one default would probably injure the borrower's credit with the dealer.

The dealer in commercial paper does not indorse the notes he sells or become responsible for their payment at maturity. He simply guarantees their genuineness. However, the banks in buying paper place much dependence upon the dealer, whose success depends largely upon his reputation for handling only good paper. Dealers in commercial paper must, therefore, maintain highly efficient credit departments which investigate thoroughly the financial condition of every client. Few banks outside the large cities can afford such departments, and they have to rely largely upon the information furnished by the note broker. Country banks in purchasing paper generally seek additional information from their city correspondents as to the credit and reliability of the issue of the paper, and banks in different cities supply each other with similar information. The reputable note broker will not agree to handle

the commercial paper of a client until after making a careful investigation of his financial condition. A financial statement is always required and this must frequently be revised. Usually the dealer will not buy paper unless the statement of the maker shows "quick assets," which include cash, merchandise, accounts and bills receivable, equal to at least twice the amount of liabilities.

Most note brokers have regular customers among the banks and trust companies to whom they offer the commercial paper. They issue weekly sheets containing the names of the makers of the notes, indorsers, if any, the character of their business, the amount of the notes, the interest rates, and the dates of maturity. Much of this paper runs for four to six months, and the amounts are seldom for less than $5,000. When the broker offers a note to a banker he usually sends with it a financial statement of the maker's affairs. The banker may take a batch of notes on a week's "option," that is, with the privilege of returning any or all of them if he is not satisfied with the report or the general standing of the makers. The usual note broker's commission is one-fourth of 1 per cent, but, as already stated, brokers are now disposed to buy the paper outright, and their profit arises from the difference between what they pay the makers and what they get from the bankers to whom they sell the paper.

The practice of buying commercial paper through reputable dealers is attended by little risk, and the losses have been comparatively small. Some firms, however, have put out excessive amounts of paper and the banks have suffered losses through buying on unverified and misleading statements. The failure in 1914 of one of the largest dry goods jobbing houses in the country with numerous affiliated retail stores having over $30,000,000 of paper outstanding drew renewed attention to the need for properly safeguarding commercial paper. The revelations following this failure showed that in some instances the treasurers of the retail companies who signed the notes were employed

in the office of the parent concern; that in some cases the notes were issued without the knowledge of the other officers or directors of the concern; and that commonly they were paid at maturity by the sale of new notes.

To safeguard commercial paper offered for sale in the general market there has been some resort to its registration in much the same way that stocks and bonds are registered before being listed on the stock exchanges. When a borrowing company's outstanding paper is thus registered with a banking house, and accompanied with statements of its general affairs, purchasers of such paper are in a better position to determine whether the company's borrowings are warranted by its capital and business. Since commercial paper is to furnish the basis of an elastic currency under the Federal reserve system, it has been proposed that the Federal reserve banks should provide the machinery for registration. The control of the Federal Reserve Board over the rediscount market would enable it to make the registration of commercial paper sold in the open market practically compulsory. The Reserve Board could also act as a clearing house for the exchange of information among the several reserve banks regarding the amount of a borrower's paper outstanding.

As shown by the accompanying chart the use of singlename commercial paper has been increasing steadily while double-name paper has declined. The future of singlename paper as an investment for bank funds may be materially affected by the spreading use of trade acceptances and by other changes growing out of the Federal reserve system. The Federal Reserve Act provides that Federal reserve banks may discount for member banks, notes, drafts and bills of exchange arising out of actual commercial transactions and having at the time of discount a maturity of not more than ninety days. The Act specifically excludes from the rediscount privilege paper issued for the purpose of carrying or trading in stocks, bonds, or investment securities, except government securi

ties. The Reserve Board has the right to define the character of the paper thus eligible for discount.

In its first regulations issued in November, 1914, defining eligible paper the Board included single-name paper, but

urged close scrutiny of such paper to give assurance that it came within the spirit of the Act and that it was selfliquidating at maturity. Future regulations of the Reserve