In the determination of its discount policy the Federal Reserve Board has been influenced by a number of factors.

In the first place, throughout the period of our participation in the war it was the desire of the Treasury that the loans of the United States be placed at low interest rates, and to this end the banking system was constrained to facilitate subscriptions to the loans at rates approximately equal to the rates borne by the bonds. A subscriber, for instance, was provided with a loan at, say, 4 1/2 per cent by his local bank, on his note for $900 with the purchased 4 per cent security as collateral, on condition that the subscriber would pay $100 down. The local bank was able to borrow at, say, 3 3/4 per cent from the federal reserve bank on its note with United States securities for collateral, and the margins between these rates were scarcely enough to cover the expense to the banks. As the subscriber through his savings liquidated his loan, the member bank was able to pay its debt to the reserve bank. This loan policy prevented the board from adopting a strictly economic policy so long as its pledge to subscribers was in effect; and thereafter shifts to a higher discount rate basis had to be by small gradations and to a moderate height, lest the money market be seriously disturbed and the war securities, along with all others, be depressed. Not until 1920 did the board advance rates to any large extent.

Again, the United States after the war stood almost alone as an important free gold market. Raising the rates of discount has not been an effective method of attracting gold to this country and easing the money market, as would have been the case in normal times. The consumptive and speculative demand, both foreign and domestic, for goods in the United States has been so intense that buyers have been little restrained by high interest rates. These conditions have been adverse to an easy and effective control of credit by means of discount rates, and the board has tried to deter credit expansion by other means than raising these rates.

Then, too, the board has been urged by Senator Owen and others to fix discriminating rates against stock exchange and other speculative loans, and leave the rates to commercial and industrial enterprises at a low figure. In so proposing, Senator Owen argued that the prevailing high call loan rates were diverting money from desirable lines to the speculative market, that such speculation was undesirable and dangerous, but that the raising of all discount rates, far from remedying the situation, would simply penalize commerce and industry. He was anxious that the board should so regulate the discount rates as to sustain the market value of United States securities. The board answered that it was not the proper province of the board to determine whether a loan was essential or not, that that matter should be decided by the reserve and local banks, and that the law did not authorize the board to fix rates that would sustain the value of the government securities.

The board has adopted the policy of "preferential rates" on certain forms of paper. The lower rate on acceptances was adopted with the idea of changing our mercantile credit system from the open book account to the trade and bank acceptance system. During the war lower rates were given to war paper. Under this policy agricultural paper is also favored.

Moreover, lower discount rates are given for short-term paper, upon the principle that the security on long-term paper is not as good as on short-term, since the shorter the maturity the less the probability that the funds obtained will be used for non-commercial and long-term financing.

The board has opposed the practice of certain clearing houses in fixing a sliding scale of rates of interest paid on deposits and using the rediscount rate as the base, inasmuch as it wishes to be free to fix its rates of discount without reference to any clearing house regulations.

The board has maintained discount rates lower than the prevailing market rates. In this respect it has differed from the practice of all European central banks. One defendant of the system has argued that the reduction of the element of risk in its loans was sufficient warrant for the difference in rates. It is probable that a fundamental original reason was a desire to popularize the federal reserve system, and to induce the state institutions to join. The wide disparity between the two rates during recent years has made the facilities of the federal reserve extraordinarily profitable for the members. Now that the system is well established and expansion has reached a dangerous degree, it seems desirable to adopt the European system, having the rediscount rate higher than the market rate and making it a source of loss rather than of profit for a member bank to rediscount, and thus rendering rediscount operations rather emergency than every-day activities.