148. DISCOUNT RATES ESTABLISHED

The following statement was issued by the Governor of the Federal Reserve Board on November 14, 1914, shortly after the inauguration of the system:

Rates of rediscount have been established as follows: New York and Philadelphia, 5 per cent for bills and notes having a maturity of not over thirty days, and 6 per cent for paper with a longer maturity; Boston, Cleveland, Richmond, Chicago, and St. Louis, 6 per cent for all maturities; Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco, 6 per cent for bills and notes having a maturity of not more than thirty days, and 6 per cent for those having a longer maturity.

The Board took this action in accordance with the provisions of the Federal Reserve Act which authorized it to review and determine rates of discount fixed by each Federal Reserve Bank. Each of the banks was requested by telegraph to suggest a rate of discount for opening, and all of these replies were tabulated. The answers showed a very decided degree of uniformity, and many of the rates have been confirmed as suggested, the lowest suggested rate being 5 per cent while the highest was 7 per cent.

After full consideration of the facts in the situation, the Board felt it incumbent to adopt a moderate and conservative policy at the outset, in view of the fact that the exact conditions to which the banks will be subjected in operation cannot be precisely foretold. It was felt that the adoption of rates of rediscount which would adequately safeguard the resources of the various institutions would be the wisest policy at the beginning, in view of the disturbed conditions in the financial world. The Federal Reserve Banks have the right, with the approval of the Board, at any time to change the rates; and the present rates are, therefore, to be regarded as provisional and subject to revision. The Board expects to be governed entirely by experience as the new banks become firmly established and accumulate data which can be used for its guidance in reaching conclusions.

150. REDISCOUNTS BETWEEN FEDERAL RESERVE BANKS The following statement was issued by the Federal Reserve Board on March 10, 1915:

In view of the possibility of an early demand for rediscounts between Federal Reserve Banks, the Federal Reserve Board today fixed a rate of rediscount for the present between Federal Reserve Banks of 3 per cent for paper up to thirty days and 4 per cent for paper of maturities over thirty days and up to ninety days.

All applications for rediscounts are to be filed with the Federal Reserve Board, the Board reserving the right to apportion the applications for rediscount among other Federal Reserve Banks.

151. THE ADVANTAGES OF A DISCOUNT MARKET TO BANKERS'

BY FRANK A. VANDERLIP

Among other things it will be the function of the twelve regional banks to loan to member banks through rediscounting for them. Not sometimes, but always and under all circumstances, we are told, the member banks will be able to rediscount at the federal reserve bank. A banker who can look into the future and know with absolute certainty that, under any circumstances, he can rediscount commercial paper in his portfolio will have removed from his life a good deal of fear.

Let us see what it means. It means that commercial paper will become the most liquid asset in the bank's portfolio. According to the practice of American banks, a loan once made to a commercial borrower must remain in the bank's portfolio until the loan matures. The exception to that is in the case of country banks which may rediscount to a limited extent with their city correspondents; but the large banks cannot rediscount. Not only is there no place for them to go, but it would be considered an exhibition of weakness. Hence a loan made to a commercial borrower by a large bank is a complete absorption of that portion of the bank's loanable funds until the maturity of the loan. If the banks in the future under this measure can always borrow, then the type of commercial paper that the bill permits as collateral for such loans becomes the most liquid asset that the bank could have.

Adapted from "Rediscount Function of Federal Reserve Banks," Proceedings of the American Academy of Political and Social Science, IV (1913-14), 140–42.

Another result will, however, come from this. At the present time, as I have said, a loan must be held until maturity. One of the great needs of the country is a discount market, a market in which we can buy and sell commercial paper that has been endorsed by banks, so that the credit of the original maker is not taken much into consideration. We need to create a situation so that banks will buy and sell commercial paper in that market, so that they may buy one day and sell perhaps another day soon after, as we now make call loans one day and possibly call them the next day if our position changes. The existence of a discount market of that character would, I believe, be of the utmost importance to commerce as well as to the banks of the country. It is impossible to have such a discount market here without a central bank fully qualified to meet the responsibility that a central bank should bear,' that is to say, in the last resort to rediscount commercial paper. We are willing to invest our funds in commercial paper under that condition. If we know that when we need partially to liquidate our portfolio, and the market will not repurchase commercial paper, we can go to the central bank and have that paper rediscounted, we can afford to buy it. It is the ability to go ultimately to the central bank for discounts that will create the discount market.

The advantage of a discount market will be that we shall no longer have to keep a great amount of funds in call loans based on stock-exchange collateral. With a minimum reserve fixed by law, all banks naturally run pretty close to that minimum. This means that they must have some part of their loanable funds in a form in which they can readily convert them into cash; that is what we call the line of a secondary reserve. Today we are forced to carry this line of secondary reserve in loans upon stock-exchange collateral because that is the only type of loan which is immediately convertible into cash. That type of loan is all right in ordinary times, because it is immediately convertible into cash. It is, however, exactly the opposite of the ideal bank loan in that it has no self-liquidating quality. The only way the loan can be paid is by shifting it, either directly or through the sale of the collateral. There is no self-liquidating quality about it, and while it is satisfactory in ordinary times, it is full of the gravest danger at a time when it becomes impossible to shift it. If we redis

This was written two months before the passage of the Federal Reserve Act, when there was still controversy over the central bank.-EDITOR.

count commercial paper in the way outlined, we shall no longer feel under the necessity of carrying large amounts of stock loans; there would be liberated for commercial uses here in New York several hundred millions of dollars. Money now devoted to stock loans belongs to the loanable funds of both New York and out-of-town banks, for many out-of-town banks come into our call loan market, their loans reaching two or three hundred millions.

A discount market will at times attract foreign capital, because it will create paper of a form suitable for the use of foreign banks. At present there is practically no loaning of foreign capital on American commercial paper.

That it is very desirable to create a central bank or banks that will have power always to loan to member banks is obvious. If the measure now before Congress will accomplish it, it will bring lower commercial rates for the whole business community of the United States. It will accomplish a leveling process; rates will go up somewhat in the cities and down in the country districts; that is to say, there will no longer be the funds devoted to the very low-rate stockexchange loans that we now have, and those funds going into commercial borrowing will tend to lower the general level of the commercial rate. It will become easier to transfer funds from one community ⚫ where there is an overflow of loanable funds to another where there is strain. All these results would be accomplished, not because banks would continuously go to these central banks and borrow money, but because they would have a place to which they could go as a last resort. They would not want to go there normally; they would not expect to borrow money at a low rate from the central banks and reloan it at a higher rate; but the ability, in the last resort, to go there would give a liquid character to commercial loans, and that liquid character would bring the improvements that I have outlined.

152. THE NATURE AND ADVANTAGES OF BANK ACCEPTANCES

A bank acceptance consists of the extension of the bank's credit to a customer by which the bank permits the use of its own credit by its client for a consideration, such credit being either secured or unsecured, depending entirely upon the business character and

Adapted from a pamphlet on Bank Acceptances, issued by the Guaranty Trust Company, of New York. (Copyright, 1915.)