28
Li It may be agreed that open-market operations on occasions are
Banks competitive with member banks but the limitations upon the reserve
banks’ open-market powers serve to soften some of the objections
which otherwise might be made against their utilization. If in adding
 funds to or withdrawing them from business use through openmarket
 operations the reserve banks could disregard the special re-Juirements
 of the bill market and if they were under no obligation
to heed the direction and volume of gold flows, there might be decided
 objection to bestowing such powers upon the reserve banks.
As it is, however, the reserve banks’ open-market powers are usually
of limited influence only, but they are important in that they serve
to increase the effectiveness of other powers.

COMMITTEE REPORT

government
Securities

The bulk of open-market transactions are in government securities
 and bankers’ acceptances. The maintenance of a discount market
‘or foreign bills in New York, and the necessity of support of an
mncompletely understood type of bill—the acceptance—require at
times that rates of acceptances be fixed with a view to considerations
other than the use of the acceptance as a credit volume control. It
is essential, therefore, that there be some asset of unquestioned value
available in substantial supply, which can be dealt in by reserve
banks. Fortunately government securities, especially short-term
Treasury Certificates, have met these tests. Without the right to buy
ind sell governments, reserve banks would be unable to exercise any
i1dequate control over the volume of reserve credit.

Recommendation

The Committee recommends that the present powers of the reserve
hanks to engage in open-market operations should be continued.

Note Issues

In the early days of the banking reform movement remedial
plans frequently were centered upon changes in note issue provisions.
 This emphasis upon note issue was due in large part to the fact
that the cause of each major disturbance was manifested superficially
oy a shortage of currency and attention was concentrated upon this
rather than upon the credit developments which may have been
responsible for the currency strain. Since, furthermore, the provision
 of currency was generally regarded as a government function,
reform plans were careful to specify that the central institution’s
10tes should be issued only under certain tlearly indicated condiions.
 In the original Reserve Act attempt Was made to emphasize
‘he special serviceability of the new system to commerce and agriculture
 by providing that reserve notes should be issued only against
he collateral of paper obtained by rediscounting.

Original
Provisions of
Law

Supply of Credit
Not Collateral,
{s Critical
Factor

The main consideration, however, as experience has shown, is
10t the collateral, but the character of operations member banks
are encouraged to engage in and the adequacy of the mass of credit
(Continued on page 30)