The mobilization of inter-district reserves is brought about by the three following means: First, by the rediscounting of one Federal Reserve bank for another of its commercial paper and other evidences of debt; second, the open market transactions of the Federal Reserve banks; third, the creation of a broader discount market for commercial paper.

Rediscount Operations Of Reserve Banks

1. Federal Reserve banks are by law permitted to invest their funds in so-called eligible paper of. a high standard, and in this way, a large part of their reserves are employed. Suppose, now, that there is an exceptionally heavy demand for reserve money in any one section of the country,-a demand which is heavier than the banks of that section can reasonably meet. The Reserve banks in every section where money is more plentiful will come to its aid either voluntarily or under compulsion of the Federal Reserve Board at Washington, and will rediscount the paper of the Reserve bank in the section under financial stress. This process will cause a flow of cash from the other Federal Reserve banks of the country to the Federal Reserve bank requiring funds, in this way easing the money market in the threatened section.

Advances By One Federal Reserve Bank To Another

During the War, a practice arose amongst Federal Reserve banks to extend loans to one another, due largely to the efforts of such banks to finance issues of Government war loans. The practice of thus extending loans to one another in case of need is even to-day an important function of the Federal Reserve System.

2. Open Market Operations. - The open market operations of the Federal Reserve banks are the second means devised for the mobilization of reserves. While dealings with the public are somewhat restricted, it is provided, however, under Section 14 of the Act, that Federal Reserve banks may buy and sell in the open market, either in this country or in foreign countries, bills of exchange, bankers' acceptances, and other specified kinds of Government obligations. In this way, a Federal Reserve bank in one section of the country may purchase and sell eligible commercial paper and other government securities in any other section of the country, thus causing a flow of money from the district of the buyer to the district of the seller, or from places of scarcity to places of redundancy.

3. Discount Markets for Commercial Paper. - The third and most important method devised for the inter-district mobility of reserves is that of establishing a broader discount market for commercial paper. Prior to the adoption of the Federal Reserve System, the country had no standard form of commercial paper, as for instance, of the class which exists in the countries of Europe.

The great discount market of London and that of France, as well as the other European financial centers, are maintained mainly by the circulation of credit instruments used in financing domestic and foreign trade transactions, similar to our trade and bank acceptances. The Federal Reserve Board was quick to see the advantage in the employment of the acceptance as a standard form of commercial paper and indicated its favoritism by discounting them at a better rate than single name paper. The Federal Reserve Board has standardized the trade acceptance and the bank acceptance and has in this way made them the basis for a discount market for the country.