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 applications
 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 borrowing
 powers thus interfered with. By insisting that such a member
 bank adhere to sound principles and accepted standards and
protect its solvency, the reserve banks are acting not only for the benefit
 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 application
 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 rediscount
 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 memser
 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 occasions
 the reserve banks have it in their power to exercise an influence
apon the outstanding quantity of reserve credit.
{Continued on page 28)