26 
Brcourageinent Utilizing the controls of rediscount to encourage sound methods 
Methods oy member banks should not be objected to on the ground of undue 
interference by reserve banks with member bank activities. Soundly 
managed member banks will usually find their discount applica- 
tions accepted as a matter of course. It is only a member bank which 
is tending to deviate somewhat from the recognized principles of 
prudent banking, in undermining its liquidity and using borrowed 
reserve credit unduly for profit purposes, which may find its bor- 
rowing powers thus interfered with. By insisting that such a mem- 
ber bank adhere to sound principles and accepted standards and 
protect its solvency, the reserve banks are acting not only for the bene- 
fit of other banks but also for the stockholders and depositors of 
‘he bank in question. 
COMMITTEE REPORT 
Recommendation 
The Committee recommends that, in passing upon an applica- 
tion for rediscount accommodation, a reserve bank should be guided 
by the general condition of the applying bank and the effect of 
granting the rediscount upon the safety of depositors as well as by 
the character of the paper which the applying bank tenders. 
It was recognized at the time the Federal Reserve Act was 
iramed that the outstanding volume of reserve credit could not be 
regulated in satisfactory fashion if the only method of influencing 
it were by changes in the rediscount rate. One reason is that redis- 
count applications rest upon the initiative of the member bank, and 
the rate is only one of the factors entering into the decision. There 
must be at times some way by which the reserve banks, upon their 
own initiative, can influence the volume of reserve credit more 
directly and more speedily than by a rate change. 
Open-Market 
Operations 
2urpose 
Effect 
To make this possible, reserve banks were given the privilege 
of dealing in bills of exchange and government securities in the open 
narket—buying from and selling to other than member banks. They 
can, by making purchases, place money in the market, and by making 
sales, take money out of the market, thus producing an immediate 
ffect upon the outstanding volume of reserve credit. 
Counteracting 
Activities 
It is to be admitted that the open-market operations of the 
-eserve banks may frequently be countered by the activities of mem- 
ser banks. Funds released to the market by purchases of acceptances 
ind government securities may be employed by member banks to 
reduce their discount indebtedness with the reserve banks. On the 
sther hand, funds withdrawn from the market by these operations 
may be offset by increased rediscounting. These processes, however, 
rake time to operate; hence, it would appear that on almost all occa- 
sions the reserve banks have it in their power to exercise an influence 
apon the outstanding quantity of reserve credit. 
{Continued on page 28)