In an earlier chapter reference was made to the devices employed by the great central banks of Europe to conserve their gold supply, and to the absence under our decentralized banking system of any such controlling authority or machinery. It is believed that under the new system the reserve banks, by virtue of their authority to engage in open market operations, to deal in gold, to buy and sell government securities, and other related activities, will be able to exercise a large measure of control over gold movements.

Several of the devices for controlling the gold supply have been mentioned in connection with the discussion of open market operations and elsewhere, but may here be briefly reviewed. The reserve banks have the right to deal in goldcoin and bullion at home or abroad. When, therefore, more gold is needed, they may bid for it at the weekly gold auction in London or elsewhere, as do the great banks of Europe. This gold may be paid for by means of credits secured by purchases of foreign bills, as previously described, or by the sale of securities held by the reserve banks. These latter include the one-year 3 per cent Treasury notes given in exchange for the 2 per cent government bonds, and the state and minor political securities in which the reserve banks are permitted to invest. Reserve banks may also "contract for loans of gold coin or bullion, giving therefor when necessary acceptable security, including the hypothecation of United States bonds or other securities which Federal reserve banks are authorized to hold.'

If this borrowing is done in foreign centers "it will make possible the sale in the United States of exchange below the export point and thus prevent a movement of gold out of the country. If purchased in the United States the gold supply of the market will be turned into the hands of the reserve banks, and released again only on such terms as they may choose to impose. This will result in raising the general discount rate in the United States, and gold exports will be discouraged."1 Again, the Federal reserve banks may regulate the gold supply by buying and selling foreign bills of exchange in the open discount market of Europe.

The most important power in the control of the gold supply is the right of reserve banks to regulate rediscount-ing by raising or lowering the discount rate. How this operates can be seen in the usages of the great central banks of Europe. Raising the discount rate increases the interest rate which borrowers must pay for the use of money and so tends to discourage borrowing. On the other hand, the high rates tempt foreign bankers to increase their accounts in local markets.

European experience seems to demonstrate that control of the gold supply can best be secured through the agency of a powerful central bank. It remains to be seen whether this can be accomplished as effectively, or at all, by twelve more or less independent regional banks. Though the several reserve banks will in normal times act independently of each other, and in times of unusual stress for gold be inclined to protect the interests of their own particular district at the expense of other parts of the country, compulsory cooperation is provided for under the direction of the Federal Reserve Board. The Board may permit or even require Federal reserve banks to rediscount the discounted paper of other Federal reserve banks at rates to be fixed by the Board. Finally, if it should become necessary, the Reserve Board has the power to suspend any and every reserve requirement of the Act, both as to reserve banks and member banks. This extreme method, which has been compared with the practice of the Bank of England in breaking the Bank Act on a few occasions, may never have to be resorted to, but it is available if made necessary by an extreme emergency.

1 Conway and Patterson: The Operation of the New Bank Act, p. 181.