The Rock Island Argus and daily union. (Rock Island, Ill.) 1920-1923, 1920-06-24

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Il sesms 70 hsve bscoms he Dolicy q bsaIs
. advance thstr discount rates commensprats-
u Win ~ adv1noss made n ~ rsdi1cosat
ratn II iths federal reserve baakL some d
them seem not to have been contsnt to limit
their advances to The advances made ~ the
federal reserve banks, but to have made the
action Of the federal reserve banks prstext
~ widen the previously existing difference be-
tween the discount and the rediscount fatas.
We NE the word pretsxt tor To season that
the action Of : FEDERAL reserve hank in increas-
Ing its rediscount rates does not necessarily
warrant member banks IN making any I'M
crease. whatever. Tho idea that It does. which
idea seems to govern the policy Of member
banks. betrays most surprising misconcep-
ton Of the purposes and functions Of the fed
eral reserve system.
1t was not the purpose in creating the fed
eral reserve system to enable the member
banks to make : profit out Of their rediscount
operations. Nor was it the purpose even to
enlarge their opportunities for increasing their
earnings in any way. The salient purpose Was
TO create and maintain reservoir Of credit for
use in time OF stress. Whenever rediscount
rates are advanced, therefore, it is done chiefly
to husband the resources Of the federal re-
serve banks Under normal conditions the
rates. of central bank, in countries which have
long had them, are higher than the open mar
ket rates, so that banks which rediscount lose
instead of gain by the operation; and prop
erly so, since the effect is to restrict the use
OF credit. which is the purpose Of the central
bank in advancing its rediscount rates. It is
Obvious that If member banks are to make q
profit on their rediscount operations they will
be under. no inducement to contract the volume
OF credit, and hencethe purpose Of the federal
| reserve bank in advancing its rediscount rates
will be somewhat baked, il not defeated.
That there is a species OF proiteering in adj
vancing discount rates on no other warrant
have advanced their rediscount rates will be-
come apparent on moments reflection. For
it is but small per centage-about IL per
cent, we believe-of the loans made by mem
Der banks are rediscounted at the federal re-
serve banks. In other words, about SO per
cent of their loans are made from their own
funds, so that when they advance their dis
count rates commensurately with an advance
made in the rediscount rates OF the federal
reserve banks they are merely increasing their
profits on nearly 80 per cent of the loans they
, make at the advanced rates. Thus what they
| in reality do is to put Replacement value
on their funds. but without, however, always
| replacing them; so that have even less excuse
than the dealers in sugar for adopting thai
| thrifty rule of pricing. If the member banks
had all of their loanable funds outstanding
or even any very large percentage Of them, il
might be both just and expedent to make addi-
| tional loans at the rates Of the federal reserve
banks. or even at rates higher than those Of ths
federal reserve banks. But when they make
their rates advance with those Of the federal
reserve banks without being under the neces
sity of rediscounting the loans made at those
! advanced rates, it is evident that they are
merely exploiting an opportunity which arises
from an unhealthful condition of finance ant
1 industry. There is the less excuse for doin,
this in the fact that the federal reserve &C
has freed for use great deal OF the none.
which the old law required them to keep il
their vaults. Since greater percentage o
their funds is thus made available for lending
they can mako their rates lower and still max
their discount operations as profitable as the
were before the institution of the federal re
serve system.
The action of the banks throughout tn
country in advancing their discount rates ha
engendered no little dissatisfaction, and tina
dissatisfaction vents itself in complaints agains
the federal reserve banks That this Is a
injustice to those institutions is made clear b
|, what has been said.