66 UNITED STATES - CREDIT 



The Act provided that the rediscount of the paper of stockholding 

 banks should in normal times constitute a Federal Bank's chief business. 

 The rate of such discount was first fixed at from 5 Y2, to 6 Y2 P^r cent., 

 according to the term of the bills. But as the Act had lowered the mini- 

 mum neces.sary reserve of the National Banks, these disposed of large sums 

 which the}^ previously could not touch and were therefore able to extend 

 their business without rediscounting their paper. Thus the available 

 reserve of the National Banks of New York rose from 8 85,000,000. From 

 being tight money became plentiful ; the Reserve Banks had to meet no 

 demand for rediscoimt except in the three Southern districts ; and at the 

 end of 1914 the rate was brought to 4 7^ and 5 per cent. At this time the 

 whole rediscount business reached the sum of §10,593,000, of wliich 

 84,027,000 belonged to the Southern districts. The rate of rediscount was 

 lowered to 4 per cent, in 191 5 ; and at the end of this year the whole re- 

 discount business figured as §32,000,000, of which sum 74 per cent, belong 

 ed to the Southern banks. On 17 June 1916 this sum had been reduced 

 to §20,425,000, §13,307,000 belonging to the Southern banks. It is how- 

 ever probable that when the abnormal conditions created by the war are 

 at an end, that is when the large facilities for credit offered in consequence 

 of the great influx of gold into the Um'ted States are no more, rediscounting 

 by the Federal Reserve Banks will be more important. 



The unimportance of this branch of business is not due to the nature 

 of the paper to be discounted. Under the Act the Reserve Banks may 

 only rediscount bills representing loans for commercial purposes ; but the 

 adjective is given a large interpretation, for all advances of funds 

 repaA'able within ninetj- days, and made b}' a bank to a borrower whose 

 current assets are in excess of liis liabilities, are considered to be com- 

 mercial loans. 



Agricultural paper and bills given for loans on cattle are given a pre- 

 ference in that they may be rediscounted even if their term be six months. 

 A large part of the rediscounting done by the Reserve Banks has concerned 

 paper of this description. Thus on 17 June 1916 63 per cent, of the loans 

 granted by the Bank of Minneapolis were of this kind, as were 36 per cent, 

 of those of the Bank of Dallas and about 2^ per cent, of those of the Banks 

 of Kansas City and Chicago. 



Rediscounting is naturally active only in districts in which ordinary 

 credit facilities do not suffice. The three Reserve Banks of the South 

 appear consequently likeh^ to be able to emplo}- considerable sums in bu- 

 siness of this kind. 



The Act supplies another means of investment to the Federal Reserve 

 Banks. They may buy in the open market bonds of the United States, 

 bonds of the various States and municipal bonds at six months, and also 

 bills of exchange arising out of commercial transactions. On 17 June 

 1916 the}- held United States bonds for 859,000,000. Of municii:)al bonds, 

 which are far less liquid, they then held §22,300,000 and had at an earlier 

 date held §40,000,000. 



The Act authorizes them to purchase and discount bills of exchange 



