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This article examines the practice of the federal reserve banks in requiring eligible or near-eligible paper as so-called "marginal" or "additional collateral," to paper discounted by them, in contradistinction to advances on member bank' notes payable collateraled by United States securities or eligible paper. As a setting for collateraled discounts, the history and purposes of collateraled advances are stated, as well as the reasons for the ascendancy of such advances over discount. In their publications the federal reserve authorities fail to acknowledge any difference between (1) rediscounting and (2) allowing advances against eligible paper pledged; nor do they report separately the absolute or relative amount of discounts to which "additional collateral" is required, nor the "margin" required, nor the number of members putting up such margins, nor any other data relative thereto. There are no provisions in the Federal Reserve act or regulations for the practice; and yet it is no mean method of credit control. The reasons offered by the reserve banks for the practice are: (1) to repress excessive borrowing by the applicant member, in the Interest of the reserve bank, of the applicant member, or of the system as a whole, using this device as a supplement to credit rationing, discount rate variation, and moral suasion; (2) to increase the protection to the reserve banks themselves for credits granted; (8) to compensate for the less rigid insistence by the reserve banks on technical qualifications in credit granting and thus to make possible greater extensions of credit to members than can be had on the strict merit of the paper offered for discount; and (4) to acquiesce in greater degree to the traditional methods of Inter-bank finance and to break down the isolation of the reserve banks from the business and financial world. Each of these reasons is examined and criticized. [ABSTRACT FROM AUTHOR]

When the federal reserve system was established, elaborate precautions were taken to provide for the elasticity of the federal reserve note. The original plan of issue ailed for the use of rediscounted paper as collateral, and the process of issue and retirement was tenuously connected to member bank borrowing. The original plan has been almost entirely abandoned through statutory changes made in response to alterations in monetary and banking practices and structures. The tremendous growth of the gold stock has been of particular significance. The collateral requirements have been modified, and note issue has been divorced from member bank borrowing. The elasticity of the federal reserve note has not been impaired, which suggests that the correct explanation of note elasticity is to be found in the rôle which cash plays in the monetary system rather than in collateral requirements. Vestiges of the original plan of note issue remain and constitute a potential source of embarrassment to the monetary system. [ABSTRACT FROM AUTHOR]

The article presents a diversity of recommendations of monetary policy. Several policies ended by one speaker are rejected by another. Most of the policies followed by U.S. President Franklin D. Roosevelt Administration are rejected. There is little sympathy with the stagnation doctrine, with government spending on a long-time basis, with promoting recovery by easy money or with giving monetary policy a dominant role in control of national economic activity. With the total volume of eligible paper in the portfolios of the Federal reserve banks amounting to only 3 million dollars, out of total assets of 19 billion for the Federal reserve banks and of 74 billion for the banks of the country and with excess cash and bank balances of 16 billion dollars and no likelihood of members borrowing from the reserve banks in the near future, it is difficult to see how any control can be exercised by qualitative considerations. To enforce the rule that banks match their total demand deposits by cash and self-liquidating paper and dispose of the non-self-liquidating loans and investments in excess of their savings deposits would be ruinous to the banks. Finally, it is becoming increasingly clear that unless taxation and labor policies, in particular, are harmonized with public investment policy, the latter can do but little to promote a higher level of private investment.

This paper examines the impact of the Federal Reserve's founding on seasonal pressures and contagion risk in the interbank system. Deposit flows among classes of banks were highly seasonal before 1914; amplitude and timing varied regionally. Panics interrupted normal flows as banks throughout the country sought funds from the central money markets simultaneously. Seasonal pressures and contagion risk in the system were lower by the 1920s, when the Fed provided seasonal liquidity and reserves. Panics returned in the 1930s, due in part to shocks from nonmember banks and because the Fed's decentralized structure hampered a vigorous response to national crises. [ABSTRACT FROM AUTHOR]

The Federal Reserve's mandate has evolved considerably over the organization's hundred-year history. It was changed from an initial focus in 1913 on financial stability, to fiscal financing in World War II and its aftermath, to a strong anti-inflation focus from the late 1970s, and then back to greater emphasis on financial stability since the Great Contraction. Yet, as the Fed's mandate has expanded in recent years, its range of instruments has narrowed, partly based on a misguided belief in the inherent stability of financial markets. We argue for a return to multiple instruments, including a more active role for reserve requirements. [ABSTRACT FROM AUTHOR]

This paper measures the effect on the federal funds rate of an open-market operation. The paper deals with simultaneous-equations bias by developing a proxy for the errors the Federal Reserve makes in forecasting the extent to which Treasury operations will add or drain reserves available to private banks. These errors induce fluctuations in bank reserves which have measurable consequences for the federal funds rate. The paper estimates that a reduction in nonborrowed for the federal funds rate. The paper estimates that a reduction in nonborrowed reserves of $30 million, if sustained for an entire 14-day reserve maintenance period, will cause the federal funds rate to rise by 10 basis points. [ABSTRACT FROM AUTHOR]

Prior to the present decade, the deficiencies of the financial system gave rise to uneconomical lending terms and to excessive rates of interest on home loans. The pronounced and continued upward sweep of the secular trend during the twenties deferred the inevitable consequences, but the ensuing crisis brought the shortcomings into sharp focus. The repercussions were national in scope and set into action various measures of reform to give relief to home owners. This paper presents a summary of the activities of the Federal Home Loan Bank System, the Home Owners' Loan Corporation, the Federal Savings and Loan System, and the Federal Housing Administration. The influence of these agencies on interest rates is discussed, followed by an analysis of the justification of the existing rate level. It is shown that present rates are no longer the result of free market activity but are governed primarily by the rate established on FHA insured loans. There is now some question of the adequacy of rates to cover the attending costs of home-financing institutions. [ABSTRACT FROM AUTHOR]

The article focuses on state bank withdrawals from the federal reserve system in the U.S. Since May, 1919, approximately 60 state banks have withdrawn from the federal reserve system. Great significance has been attached to these withdrawals by certain writers. Some regard them as an indication of general dissatisfaction with the management of the federal reserve system. The author focuses on reasons for these withdrawals and to attempt to answer the question which has been raised as to what they signify. The Federal Reserve act as originally passed made no provision whereby state bank members could withdraw. This was one of the reasons why only 11 state banks had taken out membership by May 1, 1913. The Federal Reserve Board realized from the beginning that some provision for withdrawal would have to be made, if the reluctance of state banks to join was to be overcome. When, therefore, the Board issued its regulations governing membership of state banks on, June 7, 1915, it stated that withdrawal upon twelve months written notice would be permitted, but that no more than 10 per cent of the capital stock of any federal reserve bank should be canceled for. this reason in any one year.

The article focuses on the actual efficacy of changes in the discount policies of central banks in the United States and Europe. For many, this policy has confused the public opinion rather than clarifying it. The differences of opinion that arise are usually due to divergent views as to the stability of the current business situation and the probable developments of the immediate future. The discount policy of central banks may be discussed either from the point of view of actual efficacy, or conceding that, of general expediency and temporal wisdom. The effective opponents of advances in central bank rates of discount were usually as hostile to the idea of further credit inflation as were the spokesmen for higher rates. Two methods of contracting the money are, the amortization of government and municipal debt, and the other is the rationing of credit under the guidance of the bank of issue. Trained opinion in this country would seem to harbor a belief in the potency of the discount rates of the federal reserve banks, as an instrument of credit control.

Examines the value of U.S. federal reserve banks. Practicability of the federal reserve; Problems affecting the system; Factors contributing to its success; Provisions of the Federal Reserve Act; Operation of the federal reserve system.

This essay assesses whether network linkages within the banking system amplified the real effects of bank failures during the Great Contraction. In 1929, nearly all interbank deposits held by Federal Reserve member banks belonged to 'shadowy' nonmember banks which were outside the regulatory reach of federal regulators. Regional banking panics in the early 1930s drained these interbank deposits from central reserve city banks. Money-center banks in Chicago and New York responded to volatile and declining interbank deposits by changing their asset composition. They reduced their lending to businesses and individuals, and increased their holdings of cash and government bonds. [ABSTRACT FROM AUTHOR]

Monetary policy-makers' beliefs about how the economy functions are a key determinant of the conduct of policy. That monetary policy has little impact under the prevailing circumstances is a belief which has resurfaced periodically over the Federal Reserve's 100-year history. In both the 1930s and the 1970s a belief in the ineffectiveness of monetary policy led to policy inaction and poor economic outcomes. For some of the recent period, the same view appears to have limited the policy response to prolonged high unemployment in the presence of low inflation. [ABSTRACT FROM AUTHOR]

This paper examines the problem faced by the Federal Reserve in announcing its private information about its future policies. Because it would like to manipulate expectations and pursue a time-inconsistent policy, the Fed cannot reveal its policy objectives precisely and credibly. It can, however, communicate some information about its goals through the "cheap talk" mechanism of Crawford and Sobel: making announcements that are imprecise, and only give ranges within which these goals may lie. [ABSTRACT FROM AUTHOR]

The article analyzes the Banking Act of 1935 in the United States. The author discusses the political aspects of the banking market in the country. The Administration banking bill is also summarized. The provisions of the Act is analyzed, as well as its impact on the financial markets and the factors that led to its passage. According to the author, the Banking Act incorporated some of the previous amendments and supplanted others, thus clarifying somewhat the legal status of the Federal Reserve Board and the federal reserve banks.

The U.S. Federal Reserve system has settled down upon, or at least appears about to settle down upon, certain usages, conventions, and working principles, related to banking operations, which may be outlined as follows, first, there is a general tendency for member banks to keep themselves loaned up to limits set by their lawful or deposited reserves and thus to throw upon the reserve banks the main weight of the duty to care for emergencies. Second, it is understood that the member bank shall discount and borrow at its Reserve bank only to meet seasonal and emergency reserve requirements. This, the convention against "continuous borrowing," means simply that a member bank is not to employ Federal Reserve funds as a permanent capital in its business. Member banks are inclined as a matter of private equity to regard this as the only fair practice among themselves in using the community funds which were set up by their own stock payments into the regional central banks. Third, the rediscount rate charged member banks is not the factor which really puts limits upon the demand of these banks for accommodation.

The article presents information on a popular theory of credit applied to credit policy. An attempt was made to show that rate changes per se had not been efficacious, and it was furthermore pointed out that many obstacles lay in the way of the development of an efficacious system of rate control by the federal reserve banks. Since the date of writing much additional evidence has been afforded of the lack of connection between the rates charged by the federal reserve banks to member banks, and the rates charged by the latter to their customers. It was observed that during the period when reserve bank rates were being advanced, many member banks were unaffected by the rise, because their charges were already far above the rediscount rates. Subsequent reductions in rediscount rates likewise have had little or no influence upon the charges of many member banks located in sections of the country where 8, 10, or 12 per cent is a customary rate. Implicit in all discussion of credit policies are theories as to the nature of capital, credit, and interest. To avoid confusion, these concepts need to be expressly defined and consistently adhered to, as the most serious obstacles to a lucid treatment of discount and credit policies have grown out of the tendency to use the terms in one sense for purposes of discussing money market phenomena and then to shift over to certain esoteric concepts for purposes of general economic theory.

Examines the discount policy of the U.S. Federal Reserve banks in the 1910s. Analysis of fundamental monetary and banking principles which affect the structure of the reserve system; Effects of the establishment and operation of the reserve banks; Use of credit in financing U.S. participation in World War I; Discount rate of the reserve banks; Reduction in the loans of banks to the public.

Over the past several years, a prodigious research effort has created several operational models depicting significant features of the monetary-economic process. The FRB-MIT and Federal Reserve Bank of Saint Louis models come most readily to mind, though there are others. Now that these models are on line, the research effort has shifted in two directions. The paper proposes a modest departure from the research that has gone into and appears to be coming from these models of the monetary-economic process. Despite the concurrence with the spirit of the recent research, one would argue that the work poses several problems, first it is conducted exclusively at an aggregative level and second it assumes Federal Reserve policy actions to be exogenous. But perhaps the ultimate misconstruction results from the general failure of the profession to take explicit account of the interaction between monetary actions and banking system responses. One continues to wallow in the longstanding and widespread habit of assuming Federal Reserve actions to be exogenous-actions manifested in changes in the monetary base, total reserves, unborrowed reserves, Federal Reserve credit. Such practices enmesh in simultaneous equations bias and related difficulties.

'Too-big-to-fail' is consistent with policies followed by private bank clearing houses during financial crises in the U.S. National Banking Era prior to the existence of the Federal Reserve System. Private bank clearing houses provided emergency lending to member banks during financial crises. This behavior strongly suggests that 'too-big-to-fail' is not the problem causing modern crises. Rather it is a reasonable response to the threat posed to large banks by the vulnerability of short-term debt to runs. [ABSTRACT FROM AUTHOR]

The article focuses on how intraday allocation and pricing of overnight loans of U.S. federal funds would reflect the decentralized interbank market where those loans are traded. It stated would-be borrowers and traders usually find a counterparty institution via direct bilateral contact. It described this as over-the-counter (OTC) pricing and stated the allocation mechanism is quite distinct from most centralized markets. The article mentions that most OTC markets lack comprehensive transaction-level data available for analysis, but the federal funds market is an exception. The article talks about the process of federal funds transactions and stated that loans are repaid by the end of the next business day. Many loans are made in the last hour of the day.

Although the federal reserve authorities have at their disposal a wide selection of control devices, consideration should be given to the possibility of borrowing in the money market. Professor Viner has pointed out the potentialities of this weapon and has commented on its use by the Bank of England. A review of the Bank's experience with this control technique indicates that it is a powerful selective means of tightening the money market. It may supplement open-market sales of securities or may serve at times when that particular device cannot be used. The federal reserve banks might find borrowing in the market useful, especially since the problem of monetary control in the future will probably be the restriction of expansion of bank deposits. Since a period of experimentation must precede the regular use of a new instrument of control, it is urged that the necessary legal and administrative details be worked out so that the instrument may be available if needed. [ABSTRACT FROM AUTHOR]

The article highlights issues like, the relation of discount rates and open market operations to credit control, the conflicting conditions to which credit policy is to be adapted and the "stabilization of prices mandate." Discount rate changes do not affect member bank borrowing because these banks have a traditional repugnance against borrowing except in times of "emergency." They will borrow if they must, even at "penalty" rates. At ordinary levels an increase of discount rates does not operate as a deterring cost factor. Therefore, to tighten money rates in the market, for whatever purpose, Reserve banks must sell securities. This process withdraws funds from the market and impairs member banks' reserves, and tightens money. Reserve might be replenished by borrowing at the Federal Reserve bank, but here the "convention against borrowing" interferes. The "psychological" effect of discount rate changes would not be very enduring if it were not based upon sound economic reasons. There are probably two considerations which explain why this "psychology" is effective, and why the "convention against borrowing" has become traditional.

Focuses on the functions of the federal reserve system in the United States. Provision of assistance to the Treasury in making short-term borrowings; Provision of the credit basis for financing exports on credit to Europe; Chief elements of the policy of a central bank or system of reserve-holding institutions that are disclosed in connection with the attitude toward gold, currency and credit.

This article offers a commentary on a model and evidence on Federal Reserve defensive open market operations presented in the recent issue of "American Economic Review." It criticizes the B-S results and conclusions on the monthly cycles in R and the factors that contribute to R. B-S also discussed findings on cycles at the 2.2 frequency. Furthermore, the B-S series on week-to-week changes in currency outside all banks does not measure the currency changes which in principle affect Federal Reserve defensive operations. This from the consideration that changes in currency outside all banks may reflect transfers of currency between the public and nonmember banks. Clearly, currency outside member banks only is the proper index of the currency changes which in principle influence the Fed's behavior.

Monetary policy operates directly on the Federal Reserve Bank's portfolio of government securities, the requirement ratios and the rediscount rate. The transmission of the desired effects to the target variables presupposes a systematic connection between policy and target variables crucially mediated by a set of monetary magnitudes. It therefore appears convenient to subdivide the monetary mechanisms into two branches such that one relates policy and monetary variables and the other associates monetary variables with income or prices. Money supply theory explicates the first subrelation and money demand theory together with aggregate demand theory defines the second subrelation. An evaluation of the degree of effectiveness of monetary policy consequently involves a comparative appraisal of rival theories concerning the properties of the two subrelations. Analysis of these patterns indicates that they are equally consistent with alternative hypotheses that imply opposite statements about the effectiveness of monetary policy. Explication of vague conceptions into empirically significant theories thus forms a necessary step in the resolution of conflicting ideas.

The article presents authors' comments on various aspects of monetary policy. One of the authors asserts that there are five things the Federal Reserve Bank should know. These include combined goals, to aim for, future business conditions, speed of its' policy, the change in aggregate demand per dollar change in the reserve base, and the advantages and disadvantages which monetary policy has apart from its effects on stabilization. Moreover, to use monetary policy effectively one should have to know, not only one particular trade-off ratio, but also the most efficient ratio. The article further adds that monetary analysis is divided into two steps. Step 1, which deals with the supply of money is to be solved in terms of general equilibrium analysis of portfolio behavior in the money and capital markets. The model involves a demand function for debt instruments by the banking sector, and a supply function of debt instruments by the non-bank sector. Income appears as a variable in the supply function only and is assigned a quite minor role. Step 2 is to be looked at as a problem in money demand theory, the demand for money by the non-bank sector being determined primarily in relation to income. Portfolio considerations may enter but are assigned a quite minor role.

The present article is not concerned with problems of the United States import policy. It discusses, rather, the significance of certain prospective or inferred changes in the volume and the real value of imports. Summarizing a series of projections made by economists in a study prepared at the Federal Reserve Bank of New York, this article first discusses a method of estimation that is largely based on individual commodity studies rather than on aggregative trend projections. If demand increases faster than domestic output and prices tend to rise, imports become more attractive within a given tariff and freight rate structure. Conversely, if prices fall, a specific tariff or a rigid freight component imposes a relatively greater burden on the foreign product and tends to shift the competitive advantage in favor of the domestic supplier. An attempt to project commodity prices over long periods of time appears, at first sight, to face formidable obstacles. Upon closer scrutiny, however, a number of specific factors tend to narrow the range of contingencies within the empirical economic framework that characterizes individual commodities.

The article discusses the establishment the U.S. Federal Reserve System. What the builders of the Federal Reserve System were constructing was machinery by which temporary scarcities of funds and particularly of currency could be met by obtaining accommodation from a central reservoir. In practice, while the Federal Reserve System has made it possible for all member banks to obtain additional funds by rediscounting with the Federal Reserve banks, the practice of holding large balances with New York banks where they can be used to make street loans has continued. The original conception of the workings of the Federal Reserve System overlooked two fundamental conditions. First, that the purpose for which a note is drawn has no relationship to the use to which the proceeds of the rediscounted note are put. Secondly, that a dollar obtained from a Federal Reserve bank can become the basis of a credit expansion several times as large. While the quantitative or general approach was dominant in Federal Reserve discussions in the 192Os, the selective control idea was never abandoned or ignored. Discount rates were raised in 1919 and 1920 as anti-inflationary measures of a quantitative character.