The Securities Department The Securities Department handles the open-market transactions in United States securities and municipal warrants, makes and keeps the purchase and sale contracts, keeps records of the securi ties owned and of those held for safe-keeping, the purchases and sales and allotments of United States bonds covering the national bank notes and federal reserve bank notes, and the purchase and sale of securities of member banks and for other federal reserve banks.
Resources and Liabilities of the Federal Reserve Banks In the following statement, as of July 17, 192o, the resources and liabilities of the twelve federal reserve banks are grouped and numbered for convenience in describing them.
In the scrutiny of the above statement it will be noted that the reserves of the federal reserve banks are held in different places: the gold coin, gold certificates, legal tenders, silver, etc. (items i and 6), are the till money held in their own vaults; the gold settlement fund (item 2) is held in Washington, D. C.; other gold (item 3) is held by agencies abroad, such as the Bank of England and others; other gold (item 4) is held by the federal reserve agents, as security against the federal reserve notes and for other purposes; and the redemption funds (items 5 and 13) are also held at Washington, the one against the federal reserve notes being lawful reserve, but not the one against the federal reserve bank notes. This allocation of parts of the reserve to different places and uses does not mean that it is any less a re serve, but rather that it is a more efficient reserve, for it is placed where payments are most conveniently and frequently made.
The earning assets of the reserve banks consist of short-term bills and long-term investments. The bills are of two types: those secured by government war obligations (item 7) and commonly called "war paper" and those of a direct commercial origin (items 8 and 9). The bills are discounted for the member banks and are called "rediscounts" (item 8), or else they are bought in the open market (item 9). The United States securities (item io) are those bought by the banks for investment purposes, or purchased in the process of retiring the national bank notes or in the process of issuing federal reserve bank notes under the Pitt man Act, or acquired in the process of collecting debts, etc. The methods and occasions of acquiring these various earning assets are described in later chapters.
The investments of a federal reserve bank are purchased from member banks or in the open market here and abroad. Practi cally all are voluntary purchases for the purpose of earnings. The bank, however, may be compelled by the Federal Reserve Board to purchase 2 per cent bonds, as well as commercial paper, from its member banks. The nature of these investments is strictly defined by law and regulated by the board. Their essential fea ture is that they be highly liquid.
The assets of the central bank in any system should be cash or highly liquid investments, its earning assets should constitute but a small fraction of its resources, and the rest of its assets should be in current funds held against emergencies. Such a bank is then able to absorb commercial paper in a redundant market, and to release it in an undersupplied market; or, in other terms, the bank can loan out funds in a tight money market and contract them in an easier market. By such open-market opera tions the reserve banks will, when the system is developed, con trol the money market.
Such operations by the federal reserve banks make the market rate conform to the rediscount rate set by themselves and the board. By becoming an active factor in the market, buying and selling at the established rates, the banks can make their redis count rate effective; otherwise, whether it would be effective or not would depend wholly upon the extent to which members chose to rediscount. By this means the reserve banks are also able to maintain a reasonable and stable discount rate. A power of control, however, is possible only if the reserve banks have a substantial amount of loan funds at their disposal, if the open market purchases are commercial paper, and if really a broad discount market exists. The Federal Reserve Act was so drawn as to eliminate from the transactions of the reserve banks call loans (see Chapter XXI) on stock exchange collateral, because experience had shown that in panics such loans could not be realized except by selling at a sacrifice the collateral on which they were based. For this reason during the war it was found neces sary to supplement the control by the reserve banks with a volun tary "Money Committee" in New York, which so pooled the fund available for call loans as to control the call loan rate.