As one branch of the money-market the acceptance market is strongly influenced by competitive conditions in the call-money market. Funds tend to be diverted from the acceptance market when alluringly high rates prevail in the call market. After a time, however, acceptance rates are sympathetically affected.
is less important than the "bill" or the acceptance market. The commercial-paper market is peculiar to the United States. Its stock-in-trade is the single name promissory note issued by large prospective borrowers. Only names of nationally known firms will suffice to give currency to this type of paper in the market. The commercial-paper market is not open in the sense that notes once sold are again offered for sale. In the great majority of cases paper is held by the pur chasers until maturity. Promissory notes are primarily attractive to those having funds to invest for a reasonable period of time. The commercial-paper rate is naturally higher than the call money or the bill rate, but it is also steadier.
Another important factor in the operation of the money market is the government securities mar ket. This division of the money market developed its great sig nificance after the World War. Since then Government finance has been on a stupendous scale. Periodically the Government re quires large sums not only for current expenditure but for re financing, and for the funding of floating obligations. These opera tions provide a large turn-over in the market. Government re ceipts and expenditures are so enormous that it also often becomes necessary to issue large amounts of treasury bills in anticipation of revenue. These bills find a ready market and form in conse quence a very satisfactory form of temporary investment. The liquidity of Government securities has been greatly stimulated by legal provisions which permit member banks to borrow from the reserve banks, using such securities as collateral and which further permit the reserve banks themselves to buy and sell these govern mental issues as considerations of policy may warrant.
in the United States also plays an im portant role in money-market procedure. Reference has already been made to the heavy borrowings by brokers and dealers in in vestment securities. But beyond this the system of daily settle ments on the stock exchange offers attractive opportunities for liquid temporary investments for others. The banks themselves are heavy purchasers of securities. A marked development in this direction has been stimulated by the growth of deposits of which large amounts are invested in securities, chiefly Government issues and municipals of various types. But business firms and in dividuals also invest temporarily idle working capital in bonds and even in stock, relying on the fact that, subsequently, when such capital is again required for ordinary business operations, these investments can be promptly sold. The security markets thus offer an enormous reservoir, into which idle funds can be drained, and from which, when occasion demands, they can again be pumped. American Banking Abroad.—The development of American banking abroad has also profoundly affected the domestic money market. American banks are purchasers of foreign bills and in other ways as well lend funds in foreign centres. There is a con siderable shifting of funds back and forth from one international market to another according to the competitive lure of the respec tive discount rates and the state of the exchanges. In like manner
foreign banks buy American bills and carry heavy New York balances. These operations swell the flow and ebb of funds in New York.
Procedure in the New York market is very flexible. Through the effective clearing and transfer system operated by the Federal Reserve banks large sums can be rapidly shifted to and from New York. A slackening of demand for funds in the interior thus leads quickly to their transfer to New York where they can be profit ably loaned or invested. An increased interior demand for funds is similarly accompanied by a rapid withdrawal from New York. The New York market may thus be regarded as the great national money shock-absorber.
The Federal Reserve System plays an important part in this procedure. Allusion has already been made to its clearing and transfer operations. As pressure de velops in the money market the reserve system can be turned to for relief. Member banks may borrow from the reserve banks by giving their own notes secured by U.S. Government issues and by eligible bills. They may also rediscount paper drawn from their portfolios. Additional reserve funds are also supplied to the market indirectly: (a) when the government borrows from the reserve banks to meet maturing obligations or to obtain working funds. As these funds are paid out they tend to return subse quently through depositing by the payees, as a part of the member banks' reserve account; (b) when bills are sold to the reserve bank through the open market, the funds used to pay for these bills tending also to get into member banks' reserve balances; (c) when dealers in U.S. securities sell such securities to the reserve banks under so-called "repurchase agreements"; (d) when the reserve banks themselves take the initiative in adding to their hold ings of bills and securities.
The Federal Reserve System, like other central banks is, at least to some extent, in a position to supervise and to safeguard the money market. The reserve system cannot con trol operations in detail. It cannot, for example, lend at all in the security markets. The member banks must assume full responsi bility for loans to brokers and dealers in connection with invest ment and speculative operations in securities. But through the control of final reserves and of the discount rate the reserve sys tem may determine the conditions under which member banks can get funds for further expansion. Through its open market operations it can also directly influence the volume of reserve bank credit available. Through its wide powers in foreign opera tions relating to foreign exchange and to gold movements it can act to safeguard the basic reserve position. Although there are 1 2 independent reserve banks the important open market operations are conducted mainly through the New York market by a com mittee representing the system as a whole. Similarly, the exer cise of its supervisory powers by the Federal Reserve Board has tended to give unity in discount procedure. The reserve system thus acts as the foundation of the money market, and as its super visor and protector. (E. E. A.; X.)
See G. Clare, Money Market Primer and Key to the Exchanges (1936); M. F. Joliffe, U.S. as a Financial Centre (1935).