144

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  customers, ­
  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  resources ­
  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  monetary ­
  discomfort.
In  anticipation  of  this  tendency  the  Federal  Reserve ­
  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  amendments ­
  of  July  21,  1918,  the  Federal  Reserve  Board
established  a  preferential  rate  of  discount  for  notes
of  member  banks  secured  by  government  obligations ­
  —  certificates  or  bonds.  Federal  Reserve
Banks  were  further  authorized  to  discount  for  nonmember ­
  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