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WAR BORROWING

of the next Liberty Loan, the member bank may
substitute as security for its notes the notes of its
customers secured in turn by the new Liberty Loan
bonds. As payments are received from these cus-
tomers, or as the bank obtains funds in other ways,
it is enabled gradually to reduce the amount of its
borrowings from the Federal Reserve Bank.

The periodic withdrawal of government deposits
in the form of remittance of quotas to the Federal
Reserve Banks might be expected to subject the re-
sources of the depositary banks to recurrent strain
— reflected in turn in general monetary disturbance.
Eventually the funds so remitted and thereafter
disbursed in government expenditure would, in part
at least, find their way back into the banks; but the
interval would be considerable enough to cause mone-
tary discomfort.

In anticipation of this tendency the Federal Re-
serve Board took early steps to ensure that “ there
should be no disturbance in the money market and
that interest rates should be normal and as free as
possible from fluctuation.” Accordingly before the
subscriptions to the First Liberty Loan had closed
and in anticipation of the Federal Reserve amend-
ments of July 21, 1918, the Federal Reserve Board
established a preferential rate of discount for notes
of member banks secured by government obliga-
tions — certificates or bonds. Federal Reserve
Banks were further authorized to discount for non-
member banks, upon the endorsement of a member
bank, notes secured by government obligations,
whether made by the non-member banks themselves
or by their customers, when the proceeds had been