Treasury bills were not issued in the 1920s, and the Reserve banks held very little debt. The Federal Reserve discounted eligible paper offered by banks, purchased bankers acceptances and gold because the U.S. was on the gold standard. To operate in a more classic way, the Federal Reserve would have to make rules for eligible paper to prevent the central bank from taking on excessive credit risk and to avoid the importunings of government officials and private citizens who want their projects financed by the central bank. The Federal Reserve could restrict its operations to purchases and sales of prime commercial paper issued by financial institutions and corporations with the highest credit ratings. Outstanding commercial paper now totals several hundred billion dollars, more than enough to serve as a market in which to conduct policy operations.
Markets exist also for bankers acceptances and bundles of loans.
Federal Reserve purchases and sales in these markets would strengthen the markets and contribute to more active trading. Initially, I was concerned that Federal Reserve purchases would be large enough to cause commercial paper to go to a substantial premium relative to longer-term instruments. This, in turn, would encourage more offerings, perhaps shortening the duration of corporate liabilities. This is entirely feasible and has a long tradition in central banking. Again, there is a disturbing side effect.