The urgent need of restraining bank expansion in 1920 led to an amendment of the Federal Reserve Act to the effect that the discount rates of the federal reserve banks, fixed "subject to the approval, review and determination of the Federal Reserve Board may be graduated or progressed on the basis of the amount of the advances and discount accommodations extended by the federal reserve bank to the borrowing bank." The board and reserve banks can put this amendment into effect only through uniform rules applying to all member banks alike without discrimination. Under this device the reserve bank will establish "lines of credit" for its members, and the member banks will know in advance that funds borrowed beyond a specified figure will involve a specified penalty above the published discount rate, graded upward as its borrowings exceed its normal line. This will stabilize the published rate and confine the fluctuations chiefly to the surcharges. This elastic limit is better than the actual refusal of the reserve bank to extend further accommodation. Certain of the reserve banks have adopted this new system; others rely upon raising the general rate level.
A reserve bank which adopts the plan of extending lines of credit sets a basic line to which the normal or basic discount rate applies. The basic line adopted (1920) by the Atlanta, St. Louis, and Kansas City banks is two and one-half times a sum equal to 65 per cent of the member bank's average reserve balance plus its paid-in subscription to the capital stock of the federal reserve bank, both calculated over a fixed period either preceding or identical with the period to which the basic line applies. For the Dallas district, however, a basic discount line is used equal to the paid-in capital and surplus of the member bank. The Atlanta and St. Louis banks apply the normal rate to all offerings for rediscount, and apply a progressive "super-rate" at the end of the reserve computation period to the average borrowings in excess of the basic line. The Kansas City and Dallas banks impose the super-rate upon such part of the current offering as may, together with the outstanding borrowings, be in excess of the basic line. As a scale of rates, all four banks increase the rate by 1/2 per cent for anything up to 25 per cent in excess of the basic line, 1 per cent for the second 25 per cent excess, 1 1/2 per cent for the third, and 2 per cent for the final quarter. Exceptions are made for certain member bank collateral notes secured by government obligations.