the New York federal reserve bank from the San Francisco federal reserve bank. Unless offset by payments in the other direction, the payment by San Francisco will necessitate a transfer of reserve money, presumably through the "gold settlement fund," from San Francisco to New York. If the New York bank, in which the million dollar check was originally deposited, leaves the proceeds on deposit with the New York federal reserve bank, federal reserve "reserve money" will be transferred from the bank in San Francisco to the bank in New York. In this manner open market operations transfer reserve money from places of redundancy to places of scarcity, and tend to maintain a national equilibrium in our money rates./

Creation of a Broader Discount Market for Commercial Paper

The third method by which the federal reserve system is rendering more mobile our reserve money is through the creation of a broader discount market for commercial paper. As we have already seen, under the old banking system the great bulk of American commercial paper was essentially local paper with little or no market outside of the community in which it was created. The federal reserve system has provided the 8 The gold settlement fund is described on pages 75-78.

machinery by which high grade commercial paper can be rediscounted throughout the United States, and, in this connection, has sought to encourage by preferential discount rates and otherwise the use of trade acceptances and bank acceptances credit devices widely used in Europe.

When the seller of merchandise draws a trade bill upon the buyer at, say, 60 days sight for the amount of the bill, and the buyer writes across its face "accepted" and signs his name with the date of acceptance, a credit instrument is created which has very pronounced advantages over the open-book account, from the standpoint of the seller, the buyer and the bank. The seller has a definite acceptance of the goods which the buyer cannot question in the future without very good reason; he has a promise from the buyer to pay at a definite date; and he has the buyer's obligation expressed in the form of a negotiable instrument which is highly liquid, and which enjoys preferential rediscount rates at all federal reserve banks and therefore presumably at the seller's local bank and in the open market. The buyer of the merchandise who accepts the bill places his credit standing at a higher level than it would be if he bought on open book account. His improved credit should enable him to buy on better terms. Having his accounts thus given definite maturities he is less likely to be tempted to overbuy than

he would be under the loose open-book account method. The buyer is also a seller, and if he uses trade acceptances in connection with his purchases he is in a stronger position to demand them in connection with his sales. From the banker's point of view the trade acceptance is an ideal form of commercial paper. It bears two names, usually carries with it evidence that it represents a self-liquidating commercial transaction and not an accommodation loan, it is almost certain to be paid at maturity and not to seek renewal, is not subject to the provision of the national banking law which prohibits a national bank from loaning to one customer an amount in excess of ten per cent of the bank's capital and surplus (Revised statutes, section 5200), and it is very easy to turn into cash before maturity either by sale in the open market or by rediscount at a federal reserve bank because of the preferential discount rates given such paper. The trade acceptance is therefore incomparably more liquid than the open-book account, and, other things equal, is more liquid than one-name paper.

Even more liquid than the trade acceptance, because the acceptor is ordinarily of more widely recognized financial standing, is the domestic bank acceptance authorized by the federal reserve law. The bank acceptance is similar to the

The statutory provisions concerning bank acceptances will be found in section 13, paragraph 5 of the federal reserve act.

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