DEFENSIVE OPEN MARKET OPERATIONS AND THE RESERVE SETTLEMENT PERIODS OF MEMBER BANKS*

Abstract

PERHAPS TO A GREATER EXTENT than any other institution of the Federal government, the central bank has stressed the importance of free markets and the judicious and careful approach that should be taken with regard to their regulation. This approach suggests the need for a continuing reevaluation of monetary policy techniques and regulations in the light of the general notion respecting the superiority and efficiency of private and free financial markets. It is in this spirit of review and re-examination that this paper focuses on today's regulations concerning the reserve settlement periods of member banks. For there appears to be a strong possibility that these regulations have actually produced results which impose heavy yet unnecessary responsibilities both on private financial markets and on the monetary authorities while at times also adding to the operating difficulties of the banks. The purpose of the following paragraphs is to suggest the nature of this problem, to point toward a two-fold solution-lengthening and staggering member bank reserve settlement periods-and to encourage further study along these lines by the monetary authorities. To provide the reader with the necessary background information, part II delves briefly into the origins of member bank reserve settlement periods and then describes current regulations. In part III the objections to the settlement procedures of today are outlined. Foremost among these objections is that the present regulations appear to create conditions which require the execution of the major portion of Federal open market operations and therefore account for a degree of interference in the private market that is not consistent with the stated objectives of the monetary authorities. By way of removing the undesirable features of the present system, part IV offers an alternative, namely, a monthlong settlement period for all member banks accompained by staggered settlement dates; and the workings of the proposed system are outlined.