from the Federal Reserve Board to accept drafts or bills of exchange drawn upon it. It was assumed, in making up the hypothetical case, that the cotton buyers had a contract to sell cotton to a firm in Liverpool and that they held the cotton subject to shipping orders of the Liverpool firm. Because of freight rates and shipping conditions the Liverpool firm changed its policy and directed that the cotton be delivered to a State warehouse and following shipment to that warehouse sale was made of the cotton to a New England spinner. It will be seen that this sale was not contemplated when the original transaction was begun and the acceptance made by the national bank.

Here follows the letter of the Board in connection with the matter:

In reply to your letter of December 1, the Board has instructed me to state to you that in its opinion the bank would be justified in accepting drafts drawn upon it, in case at the time of the acceptance there is a bona fide contract for the importation or exportation of the goods involved. The bank is in that case financing in good faith a transaction involving the importation or exportation of goods, and if at a later date unforeseen events should prevent the importation or exportation and therefore cause a different disposition from what was contemplated when the transaction was entered into the Board does not think that the bank would be considered as having acted ultra vires in having accepted for the transaction in question. DECEMBER 10, 1915.

Responsibility on Acceptances.

In reply to your letter of December 11, inquiring as to whether "the Federal Reserve Board will require statements which must prove satisfactory to them, or whether it means that forms only of statements made by acceptors of bills of this character are to be approved by them," I am instructed to say that, as the language of the regulation indicates, the Board has held only that the statement shall be satisfactory in form.

The reason for adopting this policy is that the Board feels that the ultimate responsibility in purchasing these acceptances must rest with the banks, and that the Board in passing upon the actual balance sheet would be in a position of having passed upon the quality of the credit of the acceptor. The Board deems it its duty only to see to it that the bank takes adequate precaution in satisfying itself as to the standing of the acceptor.

You asked the Board to furnish you with a supply of forms. The Board recognizes that there must be some elasticity in the requirements governing statements of private bankers. The very large firms would not be willing to give a statement as detailed as would be necessary in dealing with firms of lesser importance. DECEMBER 16, 1915.

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Election of Advisory Council.

The question having arisen with reference to the time of electing members of the Advisory Council for the coming year, I am instructed to advise you that, in the opinion of the Board, such elections should be conducted at a meeting after the first of January, when the newly elected directors have taken office. In those cases where the directors already holding office have been reelected, the time of holding the election would be a technicality, but it is nevertheless believed that the practice should be uniform throughout. DECEMBER 16, 1915.

Purchase of Bonds.

I have your letter of December 9, in reply to which I will say that you are mistaken in your idea that you could not purchase, under section 18, the entire year's quota of Government bonds in the first quarter.

Whatever you should buy in the first quarter in excess of the first quarter's allotment would be taken into account in the successive quarters of the year.

DECEMBER 10, 1915.

Tenure of Office.

The question has been brought before the Federal Reserve Board from various sources whether the officers and employees of Federal Reserve Banks are to have a definite tenure of office or are to hold office subject to the pleasure of their boards of directors. Investigation. shows that there is a lack of uniformity in the by-laws of the several banks on this subject and that no definite action has thus far been taken as regards the Board's own relation to the matter.

I am, therefore, instructed to advise you that the Federal Reserve Board has determined to ask the several banks to submit to it each and every year as of January 1 their lists of officers and employees, with salaries, for approval, such action to be a matter of regular routine, involving a preceding annual action on the part of each board of directors in electing or reelecting officers and employees for another year. It is also suggested that (in the course of each such year) the officers and employees or each bank shall be considered to hold their appointments for the calendar year and subject to the pleasure of the boards of directors of such banks. DECEMBER 23, 1915.

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.

IV. Domestic bills of exchange.

A bill of exchange may be defined as an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a certain sum in money to, or to the order of, a specified person or to bearer.

A domestic bill of exchange is payable in dollars in the United States.

The Federal Reserve Board has determined that a bill, 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.

V. 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.

VI. Rates.

Federal Reserve Banks desiring to engage in openmarket transactions in domestic bills of exchange shall communicate to the Federal Reserve Board the rate they desire to establish, for review and determination.

CIRCULAR NO. 11, SERIES OF 1915.

WASHINGTON, December 27, 1915.

ELIGIBILITY OF CANDIDATES FOR DIRECTORSHIPS.

The Federal Reserve Board has adopted under date of December 23 the following resolution:

Whereas, It is the opinion of the Federal Reserve Board that persons holding political or public office in the service of the United States, or of any State, Territory, county, district, political subdivision, or municipality thereof, or acting as members of political party committees, can not consistently with the spirit and underlying principles of the Federal Reserve Act, serve as directors or officers of Federal Reserve Banks.

Resolved, That the Federal Reserve Board hereby expresses to the member banks its opinion that no such persons should henceforward be elected or act as directors or officers of Federal Reserve Banks; and prescribes as a condition of eligibility that candidates for election shall comply with the terms of this resolution.

Resolved further, That copies of this resolution be sent to every member bank and Federal Reserve Bank and to all directors of Federal Reserve Banks.

While the Board is of the opinion that the policy outlined in this resolution should become effective at once, directors of Federal Reserve Banks elected prior to the date of its adoption will not be required to resign their positions as such directors until the end of the term for which they were elected.

Sir: This office has been requested to give an opinion on the following questions:

What dividends, if any, is a member bank entitled to receive on stock in its Federal Reserve Bank which is surrendered and canceled before the payment of the first regular dividend(a) On account of liquidation of such member bank;

(b) On account of a reduction in the capital or surplus of such member bank; and

(c) On account of the withdrawal of its membership as a result of its becoming ineligible to hold stock in the Federal Reserve Bank by reason of changes made by the Federal Reserve Board in the geographical limits of its district. Before dealing with these specific questions it is necessary to consider the status of a member bank as a stockholder of a Federal Reserve Bank. Ordinarily a stockholder of a corporation is entitled to share in the net earnings of such corporation after the payment of expenses and the discharge of any obligations such as interest on bonds, preferred stock, etc., which constitute a prior lien on such earnings. In the case of Federal Reserve Banks, however, section 7 of the Federal Reserve Act, relating to the division of earnings of such banks, provides

as follows:

After all necessary expenses of a Federal Reserve Bank have been paid or provided for, the stockholders shall be entitled to receive an

annual dividend of 6 per cent on the paid-in capital stock, which dividend shall be cumulative. After the aforesaid dividend claims have

been fully met, all the net earnings shall be paid to the United States as a franchise tax, except that one-half of such net earnings shall be paid into a surplus fund until it shall amount to 40 per cent of the paid-in capital stock of such bank.

From this it will appear that the stockholders are limited to a cumulative dividend of 6 per cent; that is to say, if they remain stockholders of the Federal Reserve Bank they are entitled to receive an amount equal to 6 per cent on their cash-paid subscriptions, and if the earnings during any one year are insufficient the unpaid dividends become a charge on the future earnings of the bank.

The stock held by member banks can not, under the terms of the Act, be transferred or hypothecated. Accordingly, when a member bank for any reason ceases to be a stockholder, or finds it necessary to surrender the whole or any part of its stock in a Federal Reserve Bank, it can dispose of it only to the Federal Reserve Bank and the Act undertakes to provide a cash surrender value for such stock.

Section 5 of the Federal Reserve Act provides in part that—

When a member bank reduces its capital stock it shall surrender a proportionate amount Reserve Bank, and when a member bank volof its holdings in the capital of said Federal untarily liquidates it shall surrender all of its holdings of the capital stock of said Federal Reserve Bank and be released from its stock subscriptions not previously called. In either case the shares surrendered shall be canceled and the member bank shall receive in payment therefor, under regulations to be prescribed by the Federal Reserve Board, a sum equal to its cash-paid subscriptions on the shares surrendered and one-half of 1 per cent a month from the book value thereof, less any liability of such the period of the last dividend, not to exceed member bank to the Federal Reserve Bank.

From an analysis of this language it appears that the Federal Reserve Bank has a lien on its stock for any liability of the member bank to the Federal Reserve Bank. That subject to this lien the member bank surrendering its