It so happens that member banks have at times, in their portfolios, large amounts of commercial paper and, at different times, find a need for money. However, as they are unwilling to part with their commercial paper, knowing that they might require such loans to extend only for a period of a few days, an amendment to the Federal Reserve Act provides for short time collateral loans of not exceeding fifteen days which can be made by the Federal Reserve banks to member banks, when such loans are secured by U. S. certificates of indebtedness or Liberty bonds.

Circulation And Contraction Of Credit

The Federal Reserve System was primarily introduced for the purpose of providing a sound credit system, which, through the various means before stated, has already been found to be of great advantage to the people of the country. What is most important is the manner in which circulation and contraction of credit may be controlled. As to the former, explanation has previously been made. Regarding the latter, this is brought about by the pressure of high discount rates, which virtually compel borrowers to pay off their loans. Should this fail or halt credit over-extension, additional restrictions placed upon rediscounts would probably be recommended, which would have a direct influence upon the contraction of credit, to a normal condition.