Federal Reserve Discount-Rate Policy and Member-Bank Borrowing, 1944-50

Abstract

5 [EMBER banks resumed the practice of borrowing at Federal ReLVL 1 serve banks in I944 following a period of ten years during which the lending facilities of the Federal Reserve banks were rarely used by commercial banks. Member-bank borrowing continued after the close of World War II, and, although the amount did not subsequently reach the $goo-million level of the final war-loan drive, substantial borrowing is observed through I950. In absolute figures the amount was roughly the same as in the I920's, but the fourfold expansion of member-bank reserves in the intervening years greatly reduced the importance of borrowing as a source of member-bank reserves. With the resumption of borrowing, the rediscount rate took on renewed importance as an instrument of monetary policy. Although the Federal Reserve authorities acted four times to increase discount rates in the five years following World War II, it would be quite incorrect to say that rediscount-rate changes again assumed the importance which they had in the early years of the Federal Reserve System.2 Nonetheless, the behavior of member-bank borrowing in recent years may be studied with profit, for significant aspects of the money market's functioning are revealed by an examination of the factors governing borrowing and of the circumstances which led to discount-rate changes. In the new money-market situation, which has developed as a result of commercial and central bank absorption of government securities, changes in the discount rate are not to be regarded as impotent ceremonial actions. 'There is more than a psychological effect produced by changing the discount rate. The structure of the money market has changed greatly since the I920'S, when member banks last regularly utilized. their privilege of borrowing under nonpanic conditions.3 Both commercial banking and central banking show markedly different patterns of operation as a result of the growth of the national debt. In the case of commercial banks, their absorption of large amounts of government securities has resulted in their adopting the practice of relying heavily on sales and purchases of government securities to adjust their reserves. Although member banks continue to borrow and repay indebtedness in response to outflows and inflows of reserves, they have had an alternative means of meeting changes in their reserve positions. This development is one of the most significant consequences of commercial bank absorption of a large fraction of the expanded public debt. Many member I Professor of economics, Duke University.