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trade acceptance. It differs, however, in the fact that the seller of the merchandise draws his bill not upon the buyer but upon the buyer's bank, which accepts the bill for the buyer whose financial standing is known to the bank and who has arranged with the bank in advance to lend him its credit in this way. The seller of the merchandise having received an acceptance of the bill from the buyer's bank may discount the bill at his own bank or sell it in the open market if he does not wish to hold it until maturity. The type of domestic bank acceptance made eligible for rediscount at federal reserve banks covers bills having not more than 90 days, exclusive of days of grace, to run which grow out of transactions involving the domestic shipment of goods, provided that documents conveying or securing title are attached at the time of acceptance; and it covers bills not exceeding the above-mentioned maturity which are secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title covering readily marketable staples.

Inasmuch as bank acceptances and high grade trade acceptances, enjoying as they do preferential rates of discount at the federal reserve banks, have a wide market, their increasing use is causing more and more paper to flow away from the banks in sections of the country where the dis

count rate is relatively high to be discounted in the banks of those sections where the rate is relatively low. Such a flow of commercial paper from the dear markets to the cheap ones, obviously causes a counter-flow of bank reserves from the cheap markets to the dear ones and thereby tends to reestablish an equilibrium in discount rates. Of course, this flow is not an absolutely free one and perfect equilibrium is never obtained. The point is, however, that the widening marketability of our commercial paper under the federal reserve system is making this flow of reserve money much less sluggish than it was formerly.

Intra-District Mobility of Reserves

The forces, which act for the increasing mobility of reserve money within the boundaries of a federal reserve district, are essentially the same as those just explained for that between districts. Obviously paper of wide acceptability flows from place to place within a district more freely than paper whose merits are less widely recognized; and, within a district as between districts, the widely marketable paper flows from the places where discount rates are high and bank funds are scarce to the places where the rates are low and funds are more plentiful. Furthermore, the bank reserves of the district which have been

piped to the one reservoir, namely, the federal reserve bank, can be readily pumped to the banks of any section where funds are in heavy demand. If banks throughout the district were rediscounting in moderate sums with the federal reserve bank, and if a sudden emergency should cause an exceptionally heavy demand for funds in any section, the federal reserve bank could raise its rate of discount, thereby reducing the rediscount demands of the banks less urgently in need of funds, and could then turn larger amounts into the section where the demand was heaviest. Additional funds could be secured by the federal reserve bank within the district (as well as outside) by the sale in the open market of securities held in its "secondary reserve."

In the illustrations so far given we have assumed a fixed amount of banking funds, and have shown how these funds can be readily mobilized under the federal reserve system and concentrated at the points where they are most needed. The problem of meeting unusual calls for banking funds is, however, an easier one under the federal reserve system than the above discussion implies. The reason is that under the new system there exist in addition certain elastic elements in our supply of bank funds. These will be considered in the next chapter.

CHAPTER VII

CREDIT ELASTICITY UNDER THE FEDERAL RESERVE SYSTEM

Both bank-note currency and deposit or check currency are more elastic under the new system than under the old.

Bond-Secured Bank Notes

In order to prevent the alleged danger of an undue contraction of the currency and to protect from loss the banks owning the two per cent bonds, which were largely pledged with the Government as security for national bank-note circulation and which by reason of the circulation privilege had a value far above their investment value, the Government decided not to withdraw from circulation at once the old bond-secured bank notes. The federal reserve law accordingly continued the circulation of these notes, but contained provisions looking toward their gradual retirement. From the time of the enactment of the federal reserve act (December 23, 1913) to February 1, 1920, the national bank notes in cir

culation were only reduced, however, from $726 millions representing about 21 per cent of our total monetary circulation to $655 millions, representing about 11 per cent. To this sum there should be added, to be accurate, $201 millions of so-called federal reserve bank notes which are merely bank notes of the old type that are issued by the federal reserve banks instead of by the national banks. They are secured by a specific deposit, with the United States treasurer, of bonds or of certain short-time obligations of the United States. Up to the early fall of 1918 these federal reserve bank notes were of comparatively little consequence, but with the gradual substitution of them, for silver certificates and silver dollars in circulation, since that time, under the provisions of the act of April 23, 1918, they have been assuming increasing importance.

Federal Reserve Notes

The notes upon which the federal reserve system places its sole reliance for bank-note elasticity are the so-called federal reserve notes. These notes, which are obligations of the United States Government and are "first and paramount lien on all the assets" of the issuing federal reserve banks, have back of them specifically pledged with the federal reserve agent to the

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