Full text: Referendum on the report of the Special Federal Reserve Committee

Manner of 
of Credit 
of Member 
Banks’ Condition 
Right to 
Refuse Discount 
desirable quantity of reserve credit cannot on all occasions be 
achieved merely by assuring the eligible character of the paper re- 
discounted. On occasions of rapid business expansion, in which in- 
Aationary conditions develop, the supply of eligible paper always 
‘ncreases. This increase may be due in part merely to general in- 
creases in commodity prices. Although the reserve banks were given 
power, on such occasions, to discourage the increase in member bank 
rediscounting, by raising their rates and consequently the cost of 
reserve credit, experience has further shown that the effectiveness of 
rate increases is subject to many limitations. Some of these limita- 
tions arise from the considerable differences in money rates which 
prevail over various parts of the country so that discount rates which 
would effectively restrain some member banks from excessive redis- 
counting might not thus operate to restrict the activities of other 
member banks. 
With these limitations upon rediscount policy to secure for the 
sountry the desirable aggregate of bank credit, it would appear that 
rediscount devices are principally important from the standpoint 
of their ability to encourage the desirable type of credit activities 
of member banks. But restrictions upon eligibility determine only the 
way reserve credit may come into being and do not insure its sub- 
sequent utilization by member banks in encouraging either commer- 
rial or short-time agricultural operations. 
Member banks, whose assets are generally becoming frozen 
and uncollectable, may discount their best paper with the reserve 
banks and in this way build up the reserves which permit them to 
.ncrease their extensions of long-time and perhaps unsound credits 
to the business community. If the reserve banks rest content merely 
in securing sound paper, they may protect themselves adequately, 
but at the cost of threatening the safety of the other creditors of the 
member banks, including the depositors. In the event of failure, 
these depositors may find that their bank has pledged its best assets 
with the reserve bank and that their ability to recover has been in 
large part destroyed. It should be clear that in the general welfare 
he reserve banks cannot act in disregard of the interests of the bank’s 
lepositors even though their own security has been maintained. 
The right of a federal reserve bank to refuse to rediscount 
sligible paper has been upheld in the federal courts. In one im- 
portant decision it is stated: “Certainly it was lawful to engage in 
open market transactions by the sale of securities, to fix the redis- 
count rate and to decline to rediscount eligible paper . . . Itis 
important to note that it (the federal reserve bank) is not under any 
compulsion to rediscount eligible paper, for the words of the Act 
in respect to rediscounting are wholly permissive.” 
(Continued on page 26)

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