The relative activity of the twelve reserve banks in discount ing is indicated by the average daily holdings of discounted bills for the years 1919 and 1920: Bank 1919 192o Boston $ 142 million $ 169 million New York 726 847 Philadelphia 193 190 Cleveland 126 179 Richmond 94 104 Atlanta 87 115 Chicago 2o9 417 St. Louis 68 1o9 Minneapolis 41 76 Kansas City 83 1o6 Dallas 52 San Francisco 8r 142 $1,908 $2,530The number of banks accommodated through discounting grew as follows: The short maturity of discounted bills is highly important in maintaining the liquidity of the system. On this basis the dis counted paper holdings of the reserve banks on December 26, 1919, were distributed as follows: The calculated average of all such discounts for 1919 was 10.13 days.
2. Open-Market Operations The discount market is enlarged also by the open-market operations of both the member banks and the federal reserve banks. Member banks buy, as do the federal reserve banks, from discount companies, note-brokers, and other holders of bills. The Federal Reserve Act permits the federal reserve banks, under rules and regulations prescribed by the Federal Reserve Board, to purchase and sell in the open market bankers' acceptances and bills of exchange of the kinds and maturities made eligible by the act for rediscount, with or without the indorsement of a member bank, such purchasing and selling being permitted with banks, firms, corporations, or individuals. The open-market purchases have been made chiefly by the reserve banks in New York and Boston, which are the principal acceptance markets. Some of the interior reserve banks, however, participate in the open market purchases of the Federal Reserve Bank of New York under an agreement approved by the Federal Reserve Board, the New York bank allotting to the interior banks certain amounts of its purchases. In order to maintain an open market for bankers' acceptances, the reserve banks of Boston and New York have been called upon to make heavy purchases, and then it has been necessary for these banks, in order to maintain their reserves, to make large sales of acceptances. The total amount of accep tances bought in the open market by the twelve banks has grown as follows: The open-market operations throw the reserve banks into competition with the member banks for investments. Besides giving the banks a source of earnings and enlarging the discount market, they give the reserve banks a control over the money market and over the member banks. It is expected that,
when the foreign exchanges are again on a gold basis and are more normal and stable, the reserve banks will be able to influence the importation and exportation of gold by entering the open market.
3. Rediscount Operations Between Federal Reserve Banks All rediscount operations between the federal reserve banks are arranged by the Federal Reserve Board, under authority of Section r I of the Federal Reserve Act, which provides that a federal reserve bank may be permitted or, upon the affirmative vote of at least five members of the Federal Reserve Board, re quired to rediscount the discounted paper of another federal reserve bank at rates of interest fixed by the board. There has been such a spontaneous spirit of co-operation between the federal reserve banks that all transactions suggested by the board have been voluntarily made, and in no case has the board found it necessary to exercise its statutory authority to require such operations. By means of the federal reserve leased-wire system, rediscount operations are consummated almost instan taneously, payments being made by transfers through the gold settlement fund. Practically every day of the year such trans actions take place between some of the reserve banks. The transfer of funds in connection with the fiscal operations of the Treasury, and that occasioned by the seasonal requirements for handling the crops and for purchasing raw materials by indus tries, as well as the necessary transfer of funds for the adjustment of reserves, cause a considerable movement of bills between the various districts. The rediscount operations between the federal reserve banks for the calendar year 1920 amounted to $3,672,000,000, including $2i2,000,000 of purchased bills.
Discount Rates of Federal Reserve Banks Section 14 of the Federal Reserve Act clothes any federal reserve bank with the power to establish from time to time, sub ject to review and determination by the Federal Reserve Board, rates of discount to be charged by the federal reserve bank for each class of paper, the only requirement of the law being that the rates shall be fixed with a view to accommodating commerce and business. The board has also the power to define the classes of paper.