ARGUMENTS IN THE NEGATIVE 
ber bank, for example, on its own initiative or at the instance of the reserve bank, 
repays indebtedness to the reserve bank by withdrawing funds lent on the stock 
=xchange, the effect may be to cause the borrower to seek accommodation at another 
bank, member or nonmember, that is not indebted to the reserve bank. For the pur- 
pose of meeting the demand thus transferred without borrowing at the reserve bank, 
the bank to which the borrower applies may borrow from a member bank, which in 
turn may borrow from the reserve bank. As the result of this series of transactions 
there would be no reduction in security loans or in borrowings at the reserve bank. 
The importance of banking policy lies in promoting the soundness of member banks, 
and cooperation of these banks with the federal reserve system in carrying out banking 
policy is essential to the maintenance of sound banking conditions. For influencing 
general credit conditions, however, the federal reserve system relies on credit policy 
rather than on banking policy. 
“Credit policy is essentially impersonal and finds expression chiefly through the 
influence that the federal reserve system may exert on the volume and cost of bank 
credit through its policy of sales or purchases in the open market and through discount 
rates on member-bank borrowings and buying rates on acceptances. In determining 
upon credit policy the federal reserve system is always under the necessity of balancing 
the advantages and disadvantages that are likely to follow a given course of action. 
Low money rates may have a favorable effect on domestic business, but at the same 
time may stimulate speculation in securities, commodities, or real estate. High money 
rates, on the other hand, may exert a moderating influence on speculation, but at the 
same time may result in a higher cost of credit to all lines of business, and thus be 
detrimental to commerce and industry; ultimately they may draw gold from abroad, 
which would tend to ease the domestic situation. It is impossible to foresee all the 
offects of a credit policy and difficult to appraise them even after they have developed. 
[t is certain, however, that the federal reserve system must steer its course with 
-eference to broader developments and longer time objectives than day-to-day or 
month-to-month changes in any particular line of credit. Principal among such objec: 
:ives are the continuous provision of credit at reasonable cost in amounts adequate for 
‘he requirements of trade and industry and the safeguarding of our gold reserves 
which are held in trust to meet future needs, against unduly rapid absorption through 
sxpansion of credit.” 
A major purpose in the creation of the federal reserve system 
was to substitute an elastic currency for the inelastic currency which 
had been used since the establishment of national banks. The issue of 
currency against gold and against paper bought by the reserve banks 
in the open market introduces inelasticity. 
The Federal Reserve Act as it became law contemplated the issue of currency by 
the reserve banks against paper arising from commercial transactions which were 
financed by member banks. When commerce expanded and there were correspondingly 
larger needs for currency, the currency would expand in amount, and when activities 
in commerce and trade declined the volume of currency would contract through the 
self-liquidating character of the paper upon which it was based. In other words, the 
needs of business as those needs actually existed, and not as they were assumed by any 
board or official, would be the significant factor in determining the volume of currency. 
Of course, the plan provided for a percentage of gold as a reserve against this currency 
and afforded means for a holder of the notes to have them redeemed in gold. 
When notes are issued against gold itself, however, they have no necessary rela: 
tion to the trend of business and instead of being so secured that they are promptly 
Credit Policy 
Elastic Currency 
Original Law 
Gold Certificates 
Continued on dage 43)