The following table gives the classification of paper and the respective rates as approved by the board at a recent date. Changes are made from time to time, as expediency dictates, in each respective district. Although the rates in the twelve dis tricts are approximately equal, no effort is made to keep them exactly equal, nor are the same changes made from time to time simultaneously in all districts, nor for all classes of paper. By the system of interdistrict rediscounts the Federal Reserve Board can render the strain on the money market fairly equal. The board has taken the position that changes in discount rates cannot become effective without its previous approval. On the other hand, the reserve banks, through .the reserve agents, may apply to the board for changes in rates. The initiative, in other words, may be either with the board or with the reserve bank.
The determination of its discount policy is one of the most important of the administrative functions of the Federal Reserve Board. Not only does the board exercise a direct control over discount rates but it can also through official publication bring a tremendous pressure to bear upon the banks to conserve credits for essential uses. A raise of the discount rates by per cent at a critical time precipitates a fall of io or is points on the stock market, not because of this very small increase in the cost of borrowed funds but because it indicates that this body of un biased experts deems the banking situation critical and the borrowers realize the potential power of the board to establish prohibitive rates and force contraction. The board talks the language of public interest and far-sightedness and acts as modera tor. It also acts for the system as a whole, as against the interest of a particular district. The rates of discount established are the same to all member banks and are made public. Hence a cus tomer of a member bank knows at what rate his bank is procur ing funds; if there is too wide a difference between this rate and the rate charged him, he has a proper cause for complaint. The equalization of discount rates at the reserve banks tends, there fore, to an equalization of discount rates at the local banks, for loans of the same quality. Rates that favor a certain class of paper tend to change the mercantile credit system.
Factors Influencing Discount Policy of Federal Reserve Board In the determination of its discount policy the Federal Re serve Board has been influenced by a number of factors.
In the first place, throughout the period of our participation in the war it was the desire of the Treasury that the loans of the United States be placed at low interest rates, and to this end the banking system was constrained to facilitate subscriptions to the loans at rates approximately equal to the rates borne by the bonds. A subscriber, for instance, was provided with a loan at,
say, per cent by his local bank, on his note for $900 with the purchased 4 per cent security as collateral, on condition that the subscriber would pay $ioo down. The local bank was able to borrow at, say, 334 per cent from the federal reserve bank on its note with United States securities for collateral, and the margins between these rates were scarcely enough to cover the expense to the banks. As the subscriber through his savings liquidated his loan, the member bank was able to pay its debt to the reserve bank. This loan policy prevented the board from adopting a strictly economic policy so long as its pledge to subscribers was in effect; and thereafter shifts to a higher discount rate basis had to be by small gradations and to a moderate height, lest the money market be seriously disturbed and the war securities, along with all others, be depressed. Not until 1920 did the board advance rates to any large extent.
Again, the United States after the war stood almost alone as an important free gold market. Raising the rates of discount has not been an effective method of attracting gold to this country and easing the money market, as would have been the case in normal times. The consumptive and speculative demand, both foreign and domestic, for goods in the United States has been so intense that buyers have been little restrained by high interest rates. These conditions have been adverse to an easy and effec tive control of credit by means of discount rates, and the board has tried to deter credit expansion by other means than raising these rates.
Then, too, the board has been urged by Senator Owen and others to fix discriminating rates against stock exchange and other speculative loans, and leave the rates to commercial and industrial enterprises at a low figure. In so proposing, Senator Owen argued that the prevailing high call loan rates were divert ing money from desirable lines to the speculative market, that such speculation was undesirable and dangerous, but that the raising of all discount rates, far from remedying the situation, would simply penalize commerce and industry. He was anxious that the board should so regulate the discount rates as to sustain the market value of United States securities. The board an swered that it was not the proper province of the board to deter mine whether a loan was essential or not, that that matter should be decided by the reserve and local banks, and that the law did not authorize the board to fix rates that would sustain the value of the government securities.