Readings in Money and Banking Part 91

The corners of the triangle, C, O, and N, represent the three groups of "commercial depositors," "other depositors," and "nondepositors," and the B's represent banks. The arrows represent the flow of money from each of these four categories to the others. Thus B_{o} represents the annual withdrawals from banks by "other depositors," O_{c} the spending of this withdrawn money by "other depositors" among "commercial depositors," and C_{b} the return of the money from the "commercial depositors" to the banks. This circuit (B_{o} O_{c} C_{b}) of three links is very common. A second type of circuit is represented by a chain of four arrows (B_{o} O_{n} N_{c} C_{b}). It is ill.u.s.trated by private depositors drawing money (B_{o}), and paying wages (O_{n}) to servants who in turn spend the money (N_{c}) among tradesmen who finally deposit it (C_{b}). A third type of circuit, also fourfold, is represented by the arrows B_{c} C_{n} N_{c} C_{b}. It is ill.u.s.trated by commercial firms cashing their checks at banks (B_{c}) for pay rolls, with the cash so obtained paying wages (C_{n}) to workmen who spend it (N_{c}) among other tradesmen who redeposit it in banks (C_{b}). These three types are not the only ones, but they are so much more important than any others that they merit out undivided attention before a completer study is undertaken.... [The accompanying figure] has been constructed for the purpose of exhibiting them uncomplicated by other details.

It will be noted that not all of the flows described are examples of the _circulation_ of money. As already indicated, money may be said to circulate only when it pa.s.ses in exchange for _goods_. Its entrance into and exit from banks is a flow, but not a circulation against goods. In the diagram the horizontal arrows represent such mere banking operations, not true circulation. On the other hand, the arrows along the sides of the triangle represent actual circulation. The diagram shows four such arrows, representing the four chief types of circulation: O_{c} payments of money from "other depositors" to "commercial depositors" in the purchase of goods; O_{o} payments from "other depositors" to "nondepositors," as when a housewife pays wages; C_{n} payments from "commercial depositors" to "nondepositors," as when a firm pays wages; and N_{c} payments from "nondepositors" to "commercial depositors," as when a wage earner buys goods of a merchant.

There four types of circulation of money occur in the three circuits already described, being sandwiched between the flows from and to the banks. The first, O_{c}, is contained within the circuit B_{o} O_{c} C_{b} and, since no "nondepositors" intervene, represents money changing hands once between its withdrawal from bank and its redeposit there. The remaining types (O_{n}, C_{n}, and N_{c}) are contained within the two other circuits (B_{o} O_{n} N_{c} C_{b} and B_{c} C_{n} N_{c} C_{b}), and, owing to the fact that "nondepositors" intervene, represent money circulating twice between withdrawal and redeposit.

In short, one of the three circuits (B_{o} O_{c} C_{b}) shows money circulating once out of bank. Both the others pa.s.s through N, and show money circulating twice out of bank. The diagram, then, represents all circulating money as springing from and returning to the banks; all of it as circulating at least once in the interim; and that portion handled by "nondepositors" as circulating once in addition. Therefore, the total circulation exceeds the total flow from and to banks by the amount flowing through "nondepositors." In other words, the total circulation in the diagram is simply the sum of the annual money flowing from and to banks and the money handled by "nondepositors." The quotient of this sum divided by the amount of money in circulation will give approximately the velocity of circulation of money....

FOOTNOTES:

[324] Irving Fisher, _Purchasing Power of Money_, Appendix XII. pp.

448-454. _The Macmillan Company. New York. 1911._

[325] For a complete formula for determining the velocity of the circulation of money see pages 448-460, of the Purchasing Power of Money.

[326] The term "depositors," as here used, does not, of course, include savings bank depositors. A savings bank is not a true bank of deposit, providing circulating credit.

APPENDIX B

SOME REGULATIONS OF THE FEDERAL RESERVE BOARD

FEDERAL RESERVE BOARD

WASHINGTON, January 12, 1915.

ACCEPTANCE OF STATEMENTS IN LIEU OF CERTIFICATES AS TO CHARACTER OF COMMERCIAL PAPER

Whenever a member bank shall offer for rediscount any note, draft, or bill of exchange bearing the indors.e.m.e.nt of such member bank, with waiver of demand notice and protest, the directors or executive committee of the federal reserve bank may, until July 15, 1915, accept as evidence that the proceeds of such note, draft, or bill of exchange were or are to be used for agricultural, industrial, or commercial purposes (and that such notes, drafts, or bills of exchange in other respects comply with the regulations of the board), a written statement from the officer of the applying bank that of his own knowledge and belief the original loan was made for one of the purposes mentioned, and that the provisions of the act and regulations issued by the board have been complied with.

CHARLES S. HAMLIN, Governor.

H. PARKER WILLIS, Secretary.

FEDERAL RESERVE BOARD

WASHINGTON, April 2, 1915.

BANKERS' ACCEPTANCES

I

DEFINITION

In this regulation the term "acceptance" is defined as a draft or bill of exchange drawn to order, having a definite maturity, and payable in dollars, in the United States, the obligation to pay which has been accepted by an acknowledgment written or stamped and signed across the face of the instrument by the party on whom it is drawn; such agreement to be to the effect that the acceptor will pay at maturity according to the tenor of such draft or bill without qualifying conditions.

II

STATUTORY REQUIREMENTS UNDER SECTIONS 13 AND 14

Section 13 of the Federal Reserve Act as amended provides that:

(a) Any federal reserve bank may discount acceptances:

(1) Which are based on the importation or exportation of goods;

(2) Which have a maturity at time of discount of not more than three months; and

(3) Which are indorsed by at least one member bank.

(b) The amount of acceptances so discounted shall at no time exceed one-half the paid-up capital stock and surplus of the bank for which the rediscounts are made, except by authority of the Federal Reserve Board and of such general regulations as said board may prescribe, but not to exceed the capital stock and surplus of such bank.

(c) The aggregate of notes and bills bearing the signature or indors.e.m.e.nt of any one person, company, firm, or corporation rediscounted for any one bank shall at no time exceed 10 per centum of the unimpaired capital and surplus of said bank; but this restriction shall not apply to the discount of bills of exchange drawn in good faith against actually existing values.

Section 14 of the Federal Reserve Act permits federal reserve banks, under regulations to be prescribed by the Federal Reserve Board, to purchase and sell in the open market bankers' acceptances, with or without the indors.e.m.e.nt of member bank.

III

RULING

The Federal Reserve Board, exercising its power of regulation with reference to paragraph II (b) hereof, rules as follows:

Any federal reserve bank shall be permitted to discount for any member bank "bankers' acceptances" as hereinafter defined up to an amount not to exceed the capital stock and surplus of the bank for which the rediscounts are made.

IV

ELIGIBILITY

The Federal Reserve Board has determined that, until further order, to be eligible for discount under section 13, by federal reserve banks, at the rates to be established for bankers' acceptances:

(a) Acceptances must comply with the provisions of paragraph II (a), (b), (c) hereof;

(b) Acceptances must have been made by a member bank, non-member bank, trust company, or by some private banking firm, person, company, or corporation engaged in the business of accepting or discounting. Such acceptances will hereafter be referred to as "bankers'"

acceptances;[327]

(c) A banker's acceptance must be drawn by a commercial, industrial, or agricultural concern (that is some person, firm, company, or corporation) directly connected with the importation or exportation of the goods involved in the transaction in which the acceptance originated, or by a "banker." In the latter case the goods, the importation or exportation of which is to be financed by the acceptance, must be clearly specified in the agreement with or the letter of advice to the acceptor. The bill must not be drawn or renewed after the goods have been surrendered to the purchaser or consignee.

(d) A banker's acceptance must bear on its face or be accompanied by evidence in form satisfactory to a federal reserve bank that it originated in an actual _bona fide_ sale or consignment involving the importation or exportation of goods. Such evidence may consist of a certificate on or accompanying the acceptance to the following effect:

This acceptance is based upon a transaction involving the importation or exportation of goods. Reference No. ----. Name of acceptor ----.

(e) Bankers' acceptances, other than those of member banks, shall be eligible only after the acceptors shall have agreed in writing to furnish to the federal reserve banks of their respective districts, upon request, information concerning the nature of the transactions against which acceptances (certified or bearing evidence under IV (d) hereof) have been made.

(f) A bill of exchange accepted by a "banker" may be considered as drawn in good faith against "actually existing values," under II (c) hereof, when the acceptor is secured by a lien on or by transfer of t.i.tle to the goods to be transported; or, in case of release of the goods before payment of the acceptance, by the subst.i.tution of other adequate security;