FEDERAL RESERVE OBJECTIVES AND POLICIES RETROSPECT AND PROSPECT.

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.