The discount operations of the Reserve Banks during 1917 and 1918 are given in the accompanying table.134 be observed: From this it will 1) that advances made on member banks' collateral notes account for 85% of all discounts in 1917 and for 81% in 1918. If the monthly figures were consulted it would be seen that these reach a peak during each Liberty loan drive and show a close correlation with issues of certificates of indebtedness. 2) that discounts of commercial paper maturing after sixty but within ninety days were much larger in amount than discounts of 15-30 day paper or 30-60 day paper. In 1915 most of the commercial paper discounted matured after thirty but within sixty days; and in 1916, after ten but within thirty days.135 3) that discounts of agricultural and live-stock paper increased greatly in 1918. 4) that discounts of trade acceptances increased. During the war period the Reserve Banks encouraged the use of the trade accept134 Source of table: Fourth Annual Report of Federal Reserve Board, pp. 96-103. 135 The average maturity of all paper discounted in 1918 was 11.81 days. This figure results from the volume of advances made on member banks' ance by granting preferential rates. It was the desire of the officials of the System to have business men convert their accounts receivable into trade acceptances in order that they might have an obligation rediscountable at the Reserve Banks and in order that that their accounts might be in a more liquid condition. In 1917 the Federal Reserve Bank of New York discounted 72.6% of the bills discounted by the System; in 1918 it discounted 61.8%. In 1916 it had discounted but 10.7% and in 1915, 3%.136 The increase in the discounts of the New York Bank resulted from the vast amount of government obligations floated in that district and from the fact that commercial banks in New York City were called upon to finance numerous banks throughout the interior. The New York Bank was looked upon by the Government as its chief fiscal agent through whom it liked to conduct its fiscal operations with the other Reserve Banks. Number of Banks Seeking Accommodation. As the war progressed and as banks relied more and more upon the Reserve System, the number of banks rediscounting increased many fold. In November of 1918, 3667 banks rediscounted, the largest number rediscounting during any single month through this period, representing 42.5% of the membership. 137 collateral notes. Fifth Annual Report of the Federal Reserve Board, p. 171. 136 Fifth Annual Report of the Federal Reserve Board, p. 161. 137 Source of chart: Fourth Annual Report of Federal Reserve Board, p. 118. Fifth Annual Report of Federal Reserve Bank, pp. 170 and 206. Before America's entrance into the war the largest number rediscounting during any single month was 835 in November 1915, or 10.9% of the membership. As illustrative of the extent to which member banks borrowed from the Reserve Banks the table 138 on p. 297 has been inserted CHART XVIII: NUMBER OF MEMBER BANKS REDISCOUNTING COMPARED WITH TOTAL NUMBER OF MEMBER BANKS. which compares their borrowings from the Reserve Banks (bills discounted) with their ownership of Reserve Bank stock plus their deposits with the Reserve Banks. It will be noted that by 138 Source of table: Fourth Annual Report of Federal Reserve Board, pp. 64–67. September of 1918 their borrowings from the System exceeded their contributions to its resources. Means used to Facilitate Rediscounting. To facilitate the discounting of war paper the Board, in a circular letter dated May 22, 1917, authorized the Reserve Banks to discount nonmember bank paper or the paper of their customers when indorsed by a member bank and when secured by government obligations. Prior to this time the Reserve Banks could rediscount non-member paper if eligible and if indorsed by a member bank provided that the member bank had not contemplated rediscounting this paper when it originally made the loan. The new ruling allowed the Reserve Banks to discount freely not only paper indorsed by non-members but notes actually made by them and offered by the member bank with its own indorsement, provided of course that such notes were collateralled with government obligations.139 Another method used to facilitate the discounting of war paper was the alteration of the National Banking Act (which limited the loans to any one interest secured by stocks, bonds and real estate mortgages, to 10% of the lending bank's paid-up and un 139 For a discussion of this see Letters to College Classes in Economics and Banking, published by the Federal Reserve Bank of Richmond, p. 104. By reason of the low Bank rates, member banks were enabled to borrow from Reserve Banks and loan to non-members at a profit. Federal Reserve Bulletin, 1918, p. 1169. impaired capital and surplus) in order to permit national banks to loan an additional 10% to any one interest on the notes and bonds of the United States Government issued since April 24, 1917.140 On March 3, 1919, the Reserve Act was amended to allow the Regional Banks similarly to discount the notes of member banks bearing the signature or indorsement of any one borrower up to 20% of the member bank's capital and surplus provided that the amount in excess of 10% was secured by government obligations. 141 Not only were relaxations made in respect to the discounting of war paper but the requirements governing the eligibility of commercial paper were considerably relaxed. As the war progressed banks found an increasing amount of their paper eligible.1 Paper was taken which was not strictly liquid and which did not represent current transactions. The Reserve Banks, like the central banks in Europe, were forced to depart far from the established principles of central bank practice in their discount operations. 142 Open-Market Operations of the Reserve Banks during the War Period. In the accompanying table are given the openmarket operations of the Reserve Banks: 140 On Sept. 24, 1918. 141 Anderson and Hepburn, The Gold and Rediscount Policy of the Federal Reserve Banks, p. 15. The Board wisely resisted efforts to amend the law to make long-term paper eligible. (Fourth Annual Report of the Rederal Reserve Board. p. 19). 142 "The war thrust upon it enormous business, of a kind not contemplated when the act was passed-a business based not upon self-liquidating commercial paper but upon Government bonds, and at rates abnormally low considering the demand. This enforced departure from sound banking principles necessarily led to enormous expansions of credit-or inflation, if you prefer that term; and the problem has been ever since how to get away from it. Of course it is entirely contrary to the principles on which the Federal Reserve Act was founded to make loans on bonds, even if Government bonds, at lower rates than on commercial paper, yet in some districts we are still doing it. And indirectly we are issuing currency based upon these bonds, though that was one of the very things the Federal Reserve Act was reputed to put a stop to." Platt, Federal Reserve System Still on Trial, pp. 319-320. 143 Source: Fourth Annual Report of Federal Reserve Board, p. 130. During 1917 purchases of certificates of indebtedness were not included in the government obligations purchased by the Reserve Banks. On December 31, 1917, the Reserve Banks held $43,050,500 of certificates of indebtedness. (Fourth Annual Report of Federal Reserve Board, p. 73). |