Section 14 of the Federal Reserve Act clothes any federal reserve bank with the power to establish from time to time, subject to review and determination by the Federal Reserve Board, rates of discount to be charged by the federal reserve bank for each class of paper, the only requirement of the law being that the rates shall be fixed with a view to accommodating commerce and business. The board has also the power to define the classes of paper.

The following table gives the classification of paper and the respective rates as approved by the board at a recent date. Changes are made from time to time, as expediency dictates, in each respective district. Although the rates in the twelve disRates on Paper Discounted for Member Banks Approved by the Federal Reserve Board, in Effect June 26, 1920

Federal Reserve Banks

Discounted Bills Maturing Within 90 Days (Including Member Banks' 15-Day Collateral Notes) Secured by

Bankers' Acceptances Maturing Within 3 Months

Trade Acceptances Maturing Within 90 Days

Discounted Bills Secured Otherwise Than by Government War Obligations Also Unsecured, Maturing Within

Treasury

Certificates of

Indebtedness

Liberty

Bonds and

Victory Notes

90 Days (Including Member Banks' 15-Day Collateral Notes)

91 to 180 Days

(Agricultural and Livestock

Paper)

Boston.......

5 1/2

6

7

7

7

New York........

5 1/2

6

6

7

7

7

Philadelphia...

5 1/2*

5 1/2

5 1/2

6

6

6

Cleveland......

5 1/2

5 3/4

5 1/2

5 3/4

6

6

Richmond...

5 1/2

6

6

6

6

6

Atlanta......

5 1/2*

5 1/2

5 1/2

6

6

6

Chicago......

5 1/2

6

6

7

7

7

St. Louis.....

5 1/2*

5 1/2

5 1/2

6

6

6

Minneapolis. ...

5 1/2

6

6

6 1/2

7

7

Kansas City.....

5

5 1/2

5 1/2

6

6

6

Dallas.......

5 1/2*

5 1/2

5 1/2

6

6

6

San Francisco.

5 1/2

6

5 1/2

6

6

6

*5 1/2 per cent on paper secured by 5 1/4 per cent certificates, and 5 per cent on paper secured by 4 3/4 and 5 per cent certificates.

Note. Rates shown for Atlanta, St. Louis, Kansas City, and Dallas are normal rates, applying to discounts not in excess of basic lines fixed for each member bank by the federal reserve bank. Rates on discounts in excess of the basic line are subject to a 1/2 per cent progressive increase for each 25 per cent by which the amount of accommodation extended exceeds the basic line.

tricts are approximately equal, no effort is made to keep them exactly equal, nor are the same changes made from time to time simultaneously in all districts, nor for all classes of paper. By the system of interdistrict rediscounts the Federal Reserve Board can render the strain on the money market fairly equal. The board has taken the position that changes in discount rates cannot become effective without its previous approval. On the other hand, the reserve banks, through the reserve agents, may apply to the board for changes in rates. The initiative, in other words, may be either with the board or with the reserve bank.

The determination of its discount policy is one of the most important of the administrative functions of the Federal Reserve Board. Not only does the board exercise a direct control over discount rates but it can also through official publication bring a tremendous pressure to bear upon the banks to conserve credits for essential uses. A raise of the discount rates by 1/4 per cent at a critical time precipitates a fall of 10 or 15 points on the stock market, not because of this very small increase in the cost of borrowed funds but because it indicates that this body of unbiased experts deems the banking situation critical and the borrowers realize the potential power of the board to establish prohibitive rates and force contraction. The board talks the language of public interest and far-sightedness and acts as moderator. It also acts for the system as a whole, as against the interest of a particular district. The rates of discount established are the same to all member banks and are made public. Hence a customer of a member bank knows at what rate his bank is procuring funds; if there is too wide a difference between this rate and the rate charged him, he has a proper cause for complaint. The equalization of discount rates at the reserve banks tends, therefore, to an equalization of discount rates at the local banks, for loans of the same quality. Rates that favor a certain class of paper tend to change the mercantile credit system.