will at the same time enable them to throw exchanges on the market when rates are high. European experience has shown this to be a most useful expedient in checking unnecessary gold movements. Moreover, the full authority granted to the reserve banks to deal in, to borrow, or to make loans against gold at home and abroad and to buy and sell governmental securities, secures the possibility of creating credits that can be used either as an offset for debts, the payment of which would otherwise necessitate gold exports, or as a means of obtaining gold to strengthen reserves at home. Furthermore, through the final control of discount rates, if that control can in practice be made effective, the Federal Reserve Board acting through the reserve banks may check the outward flow of gold. If the nation's credit position is strong enough, it may even attract gold to the home market from abroad. As final guarantee to the world of the solidarity of the whole system, the gold standard is reaffirmed and the Secretary of the Treasury is authorized to purchase gold if necessary with one-year 3 per cent notes or to borrow it on the security of United States bonds. 156. OPEN-MARKET OPERATIONS1 There remain still to be dealt with under "Open-Market Operations" the purchase and sale of "cable transfers" and bills of exchange, both domestic and foreign, of the kinds and maturities by this Act made eligible for rediscount, and bankers' acceptances payable in foreign countries and in foreign currencies. The present circular and regulation is intended to cover these items. The Board wishes particularly to call attention to the purpose of the open-market section of the Federal Reserve Act. It enables the Federal Reserve Banks to exert a steadying influence upon prevailing rates of interest by the use of their purchasing power whenever conditions make such influence desirable, and when, owing to the lack of applications for rediscounts, they are unable to influence rates through the latter means. It also affords to the Federal Reserve Banks the opportunity of purchasing in the open market paper with a view to providing for their expenses and dividends. The Board is of the opinion that the Federal Reserve Banks should, when occasion warrants, stand ready to engage in openmarket transactions, as buyers or sellers, to the extent that it is necessary to carry out the purposes of the Act. I Adapted from Federal Reserve Board Circular No. 20, December 4, 1915. GENERAL OPEN-MARKET OPERATION I. DEFINITION Open-market operations, as contemplated under the Federal Reserve Act, are all those transactions authorized by section 14 of the Act which involve dealings with persons or institutions-whether or not members of the Federal Reserve System—and which do not require the indorsement of a member bank. II. CABLE TRANSFERS AND FOREIGN BILLS OF EXCHANGE In order to carry on open-market transactions in cable transfers and foreign bills of exchange (including foreign bankers' acceptances)—that is, payments to be made in, or bills payable in, foreign countries—it will be necessary for Federal Reserve Banks to open accounts with correspondents or establish agencies in foreign countries. Such bills of exchange and foreign acceptances must comply with the applicable requirements of sections 13 and 14. As the law prescribes that these connections are to be established only with the consent of the Federal Reserve Board, Federal Reserve Banks will be required to communicate with the Federal Reserve Board whenever they are ready to enter these foreign fields. The Federal Reserve Board realizes that in dealing in foreign exchange the Federal Reserve Banks must necessarily have wide discretion in determining the rates at which they will buy or sell. It is not necessary that the bills shall have been actually accepted at the time of purchase. The Federal Reserve Board, however, will require that unaccepted "long bills," payable in foreign countries, when purchased, unless secured by documents, shall bear one satisfactory indorsement other than those of the drawer or acceptor, preferably that of a banker. Federal Reserve Banks should exercise due caution in dealing in foreign bills, and boards of directors should fix a limit within which the acceptances or bills of a single firm may be taken. III. DOMESTIC BILLS OF EXCHANGE The Federal Reserve Board has determined that a domestic bill of exchange, in order to be eligible for purchase under section 14 by a Federal Reserve Bank, at the rate to be established for open-market operations— a) Must be a bill the proceeds of which have been used, or are to be used, in producing, purchasing, carrying, or marketing goods in one or more steps of production, manufacture, and distribution; but shall not be eligible if its proceeds have been used, or are to be used, for a permanent or fixed investment of any kind; for example, land, buildings, machinery, etc., or for any investment of a merely speculative character. b) Must have been drawn by a domestic or foreign firm, company, corporation, or individual upon a firm, company, corporation, or individual in the United States; but need not bear the indorsement of a member bank. c) Must have been accepted by the drawee prior to the purchase by a Federal Reserve Bank unless accompanied and secured by approved warehouse receipts, bills of lading, or other such documents covering readily marketable goods. IV. DOMESTIC BILLS CONDITIONS OF PURCHASE a) Before purchasing domestic bills of exchange, the Federal Reserve Bank must secure statements concerning the condition and standing of the drawer of the paper, and, if possible, also of the acceptor of the bill, sufficient to satisfy the bank as to the nature and quality of the paper to be purchased. b) No Federal Reserve Bank will be permitted to purchase bills of any one drawer, or issued upon any one maker, to an amount to exceed in the aggregate a percentage of its capital, to be fixed from time to time by the Federal Reserve Board, except when secured by approved warehouse receipts, bills of lading, or other such documents covering readily marketable goods. The aggregate amount drawn on any one acceptor, purchased by Federal Reserve Banks, shall not exceed a reasonable percentage of the stated net worth of the parties whose names appear upon the paper. V. RATES Federal Reserve Banks desiring to engage in open-market transactions in domestic bills of exchange shall communicate to the Federal Reserve Board the rate they desire to establish, for review and determination. 157. TIME DEPOSITS AND SAVINGS ACCOUNTS1 The Federal Reserve Board deems it advisable to define under the following headings those deposits against which the Federal Reserve Act requires a reserve of only 5 per cent to be maintained: 1. Time deposits, open accounts. 2. Savings accounts. 3. Certificates of deposit. It was clearly not the intention of the Act to permit a reduction of reserves to 5 per cent upon deposits which may be ordinarily checked upon, but in respect to which a bank, by a blanket provision in its by-laws, may at any time require a withdrawal notice of not less than 30 days to be given. The reduction of the reserve to be carried against time deposits is intended to apply only to deposits under written agreement not to be withdrawn within 30 days from the date as of which the reserve calculation is made. Therefore, on the date 1 Circular No. 6 and Regulation E of Federal Reserve Board, January 15, 1915. (Published in Monthly Letter of National City Bank, New York, February, of calculating reserve, under the definitions contained in the accompanying regulation, no deposit may be deemed a time deposit, whether on open account or on certificate a) If it is payable within 30 days, because of the approaching end of the specified period for which it was deposited or because of receipt of notice of the date on which withdrawal will be made. b) If it may be withdrawn by check within 30 days, although the bank may have the right, by written contract or otherwise, to require a withdrawal notice of not less than 30 days. Nor may any certificate of deposit be considered a time certificate if any part of the amount represented by it is subject to check or may be withdrawn without the presentation of the certificate for proper indorsement. While savings accounts may at any time, by the action of the bank, be converted into time deposits, they are, nevertheless, ordinarily withdrawable on demand. In the absence of any statutory limitation upon the sum which may be received by a bank from any one individual as a savings account, the Board has no authority, for the purpose of calculating reserves, to impose any such limitation, but it feels strongly that in the interest of both the member banks and the Federal Reserve System, the broad provisions of the Act in respect to time deposits, savings accounts, and certificates of deposit, should not be made the means of any large general reduction of reserves by a transfer to those forms of deposits which are in substance demand deposits; and it is the purpose of the Board to countenance or permit a reduction of reserves to 5 per cent only on deposits which are, in fact as well as in form, entitled to such reduction within the spirit of the Act. Banks carrying savings accounts must record them in separate ledgers which do not contain ordinary checking accounts or other items. Open time accounts and time certificates of deposit should also be carried in separate ledgers, but if carried in the same ledger with current checking accounts they must be grouped together so as to be readily distinguished from the latter. The Board desires to make it clear that the Act requires the full reserve, at the rate prescribed for demand deposits, to be carried against all savings accounts and all time deposits whether on open account or certificate, which are subject to check or which the bank has been notified are to be withdrawn within 30 days. REGULATION GOVERNING TIME AND SAVINGS DEPOSITS Section 19 of the Federal Reserve Act provides, in part, as follows: Demand deposits, within the meaning of this Act, shall comprise all deposits payable within 30 days, and time deposits shall comprise all deposits payable after 30 days, and all savings accounts and certificates of deposit which are subject to not less than 30 days' notice before payment. TIME DEPOSITS, OPEN ACCOUNTS The term "time deposits, open accounts" shall be held to include all accounts, not evidenced by certificates of deposit or savings passbooks, in respect to which a written contract is entered into with the depositor at the time the deposit is made that neither the whole nor any part of such deposit may be withdrawn by check or otherwise. SAVINGS ACCOUNTS The term "savings accounts" shall be held to include those accounts of the bank in respect to which, by its printed regulations, accepted by the depositor at the time the account is opened— a) The passbook, certificate, or other similar form of receipt must be presented to the bank whenever a deposit or withdrawal is made. b) The depositor may at any time be required by the bank to give notice of an intended withdrawal not less than 30 days before a withdrawal is made. TIME CERTIFICATES OF DEPOSIT A "time certificate of deposit" is defined as an instrument evidencing the deposit with a bank, either with or without interest, of a certain sum specified on the face of the certificate, payable in whole or in part to the depositor or to his order a) On a certain date, specified on the certificate, not less than 30 days after the date of the deposit, or b) After the lapse of a certain specified time subsequent to the date of the certificate, in no case less than 30 days, or c) Upon written notice given a certain specified number of days, not less than 30 days before the date of repayment, and d) In all cases only upon presentation of the certificate at each withdrawal for proper indorsement or surrender. |