company's cars. And since the capital stock includes the value of the franchise or right to engage in interstate trading, the state may be said to have the right to tax that franchise. If the property, the gross receipts, the capital stock including the franchise of a carrier may be taxed, what is left?

And, when we come to those interstate companies which are not common carriers but are engaged in manufacturing and trading we find their lot indeed to be an unenviable one. The common carrier may at least construct its lines and transact its interstate business regardless of the state's wishes but other commercial companies, industrial or trading concerns, cannot transact any general business within the state without its consent. They may ship their goods in from outside, they may send their traveling salesmen in to take orders and in all such operations may claim the exemptions of interstate commerce but the moment they open an office for general business within a commonwealth, they are subject to its rules, regulations and taxes and may even be totally excluded should it see fit. So for example, The Horn Silver Mining Company, a Utah corporation with ten million dollars of capital, had been taxed in Utah where it was incorporated. Much of its property lay in Illinois and there it was taxed. But in an evil hour the company decided to enter the state of New York for the transaction of local business. For the privilege of opening a local office it was taxed upon its entire capital stock, the amount of the levy being thirty thousand dollars. It protested, appealing finally to the federal supreme court and claiming that as a company engaged in interstate business it could enter any state and if taxes were levied by a state for the privilege of transacting local business within its boundaries, such taxation must fall upon the local business for which they were charged and must not be levied upon the total national business of the company. But to this objection the court made answer that every state possessed absolute, complete control over the local business transacted within its bounds, just as Congress controlled interstate trade. No outside corporation could claim the right to engage in local trade against the will of the state. Accordingly if a state wished to keep out such a company absolutely it could do so, but the right to exclude carried with it also the right to admit under conditions, and one of these conditions might be the payment of a license or permit fee for the privilege of transacting local busi

ness. If the Horn Mining Company wished to engage solely in interstate trading it might do so without paying such a license but when it opened a general office for all kinds of trade within New York State, it must first secure the permission of the state authorities. The fact that these authorities measure their license fee by the total capital stock of the company should not be regarded as proof that they were taxing interstate commerce, they were only measuring their tax by the amount of the capital stock and the levy really was a burden upon local business rather than national trade. This decision is not a temporary, freakish aberration from the general policy of the court. It is one of a long line of precedents by which the supreme court has so completely subjected national companies to state taxation that they are now obliged to evade such taxes by forming local companies with small capital to transact their local business. The stock of these local companies is owned by the parent concern. In order to secure the protection which the constitution guaranteed them they are obliged to resort to shifty expedients.

This brief survey shows how urgently we need a strong assertion of national sovereignty over national trade. State regulations and state taxes on this trade should be immediately superseded by federal action. We must remember that in all of its decisions upholding state rules on interstate commerce the supreme court has attached the proviso that such rules would be invalid if Congress should act. What we need, therefore, is action by the national government which will establish national rules to displace such interference, the further assertion by Congress of its regulative power over national trade to exempt both the carriers and other interstate companies from local taxation. The imposition by Congress of a national tax on such companies would be of invaluable assistance to the channels of national business. We should then have our interstate trade established on the sound basis of complete freedom from local interference and subject only to that flexible, adaptable and elastic regulation of the national administrative commissions which has been described. By this means only can we provide a constructive policy of regulation.

THE INFLUENCE OF THE FEDERAL RESERVE ACT

UPON COMMERCIAL BORROWING

BY THOMAS CONWAY, JR., PH.D.,

Professor of Finance, Wharton School of Finance and Commerce, University of Pennsylvania.

Many bankers and a larger proportion of the business community have not as yet realized the tremendous influence which the Federal Reserve Act will have upon methods of commercial borrowing and the relations of the borrower to the banker. More than 7,600 national banks have joined the system, while with a few exceptions 15,000 state banks have thus far elected to pursue a policy of "watchful waiting." Although the member banks are numerically in the minority, yet their commanding resources and the influence which their operations exercise in the field of business are sufficiently great to cause the changes demanded by the Federal Reserve Act to eventually reach every class in the community. The development of the long-needed improvement in the methods of business borrowing will be gradual, but we are at the threshold of a long, and, let it be hoped, steady, wise and cautious development which will not be completed for many years.

The Federal Reserve Act contemplates that only certain welldefined classes of commercial paper shall be eligible for rediscount or purchase by the Federal reserve banks. The provisions of the act bearing upon this point are found in sections 13 and 14, and are as follows:

Upon the indorsement of any of its member banks, with a waiver of demand, notice and protest by such bank, any Federal reserve bank may discount notes, drafts and bills of exchange arising out of commercial actual transactions; that is, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be be used, for such purposes, the Federal Reserve Board to have the right to determine or define the character of the paper thus eligible for discount, within the meaning of this Act. Nothing in this Act contained shall be construed to prohibit such notes, drafts, and bills of exchange, secured by staple agricultural products, or other goods, wares, or merchandise from being eligible for such discount; but such definition shall not include notes, drafts, or bills covering merely investments or issued or drawn for the purpose of carrying or trading in stocks,

bonds, or other investment securities, except bonds and notes of the government of the United States. Notes, drafts, and bills admitted to discount under the terms of this paragraph must have a maturity at the time of discount of not more than ninety days: Provided, That notes, drafts, and bills drawn or issued for agricultural purposes or based on live stock and having a maturity not exceeding six months may be discounted in an amount to be limited to a percentage of the capital of the Federal reserve bank, to be ascertained and fixed by the Federal Reserve Board.

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The aggregate of such notes and bills bearing the signature or indorsement of any one person, company, firm, or corporation rediscounted for any one bank shall at no time exceed ten 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.

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SECT. 14. Any Federal reserve bank may, under rules and regulations prescribed by the Federal Reserve Board, purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers' acceptance and bills of exchange of the kinds and maturities by this Act made eligible for rediscount, with or without the indorsement of a member bank.

Every Federal reserve bank shall have power:

(c) To purchase from member banks and to sell, with or without its indorsement, bills of exchange arising out of commercial transactions, as hereinbefore defined;

It is very important at the outset to note that the act specifically excludes notes, drafts or bills of exchange "covering merely investments or issued for the purpose of trading in stocks, bonds or other investment securities," that commercial paper, to be eligible, must "arise out of actual commercial transactions" which are explained to be paper, "the proceeds of which have been used or are to be used for such purposes." The inclusion of paper, the proceeds of which are to be used, opens up one of the most difficult administrative problems in connection with the matter of commercial borrowing, for the Federal Reserve Board, to whom, it will be remembered, is given the task of defining in detail the classes of paper which are eligible for rediscount, has had great difficulty in formulating a workable definition which will accord with the provisions and spirit of the act. A recital of the problems which have confronted the Board, and the reasons for the various regulations as promulgated, is the subject matter of this article.

The purpose of the Federal Reserve Act is to exclude all classes of paper, which are not self-liquidating. Mr. Samuel Untermyer well phrased the test which must be applied when he said:

Commercial paper, as I understand it, is that which represents an actual transaction in the consummated purchase and sale of merchandise intended for resale and consumption. It must answer the test of being an obligation that automatically discharges itself in the ordinary course of business.

Mr. Festus J. Wade, one of the committee of the American Bankers Association, in his statement before the Senate committee declared that:

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We recommend as a committee that notes be based on what is known as commercial paper: that is to say, paper that is issued for the purchase of the products of the earth, of the farm, of the factory, of the mine, of the commercial establishment. That represents the commerce that is gradually consumed within a year or within a six-month period. Every bale of cotton that is ginned is consumed within a short period of time. Every bushel of wheat is consumed within a short period of time, every bolt of calico on an active merchant's shelf gradually goes into consumption, and they issue, in order to move that commerce, what is known as commercial paper, which matures within a short time, and it consumes itself, and therefore brings back from the Nation all over the money to meet the obligation of these short-time notes. well-regulated commercial house never renews its paper.

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On February 7, 1914, the Reserve Bank Organization Committee addressed a circular letter to a number of the leading clearing house associations of the country, asking each association to suggest a definition of commercial paper, which would meet the terms and spirit of the Federal Reserve Act. While it is impossible for us to go at length into the replies of the several clearing house associations, yet a brief review of the tenor of the responses will serve to indicate the remarkable unanimity of opinion among bankers as to the necessity for an improvement in certain classes of commercial paper. The responses of the clearing houses indicated that almost without exception the problem was recognized to be that of preventing abuses in the issue of single-name paper. Single-name paper includes all notes made to the order of the maker and endorsed by him; that is to say, paper where there is only one firm or name upon it. In some cases the paper of corporations bears the personal endorsement of leading stockholders or officials, but even when this is the case it is generally known as single-name paper.

The Boston clearing house in its reply pointed out the manifest disadvantages in declaring single-name ineligible for rediscount but declared that: "We believe, however, that it is desirable to encourage the making of strict 'Commercial Paper,' that is notes or accept