The Reserve Act gives to the Reserve Board the power to review and to determine the " rates of discount to be charged by the federal reserve bank for each class of paper." In the exercise of this authority the Board proceeded in the manner indicated in the following quotation taken from its first report:

In response to a telegraphic inquiry, each bank submitted its views' with respect to the rate of discount thought to be advisable for its district. Upon tabulation and comparison of these results it was found that they did not vary greatly, the rates ranging from 5% to 7% for ninety-day paper. A study of the existing state of affairs satisfied the Board that at the start and until the banks could get a firm footing it should act with prudence and conservatism, and it was consequently voted to fix the rates of discount at from 5½% to 6%½. The rates thus initially established were subsequently lowered from time to time upon application by the respective banks. . . .

During the short period from November 16 to December 31, 1914, there was a noticeable decline in the rates. Maturities of 30 days and less dropped from 5½% and 6 to 4½% and 5%; maturities 30 to 60 days declined from 6% and 6½% to 5% and 5½%; 60 to 90 day paper moved from 6% and 6½% to 5½% and 6%. Agricultural paper settled to a 6% basis, although in some districts 6½% had been charged.

During 1915 the general development can also be most clearly set forth by quoting from the Board's second annual report (p. 5):

Fixing rates

Rates in 1914

Trend during

The Board has endeavored during the past year to develop a consistent discount policy graduating its rates according to the maturity and character of paper discounted or purchased in the open market. Beginning at the opening of the system with a comparatively high rate for ordinary commercial paper and with more or less variation between the different districts, the reserve banks have during the year steadily reduced the general level of discount rates and have worked rapidly and effectively toward uniformity for the entire country. It may not be practicable to maintain uniform rates throughout the twelve districts, but they should unquestionably bear a consistent relation one to another, while a very much greater adherence to uniformity than before the enactment of the Federal Reserve Act will undoubtedly be secured.

For the different classes of paper during 1915 the maximum and minimum rates were as follows:

These rates were not, of course, uniform throughout the whole system. The variation as between the districts was, however, not large.

During the year 1916 the Board sums up the discount situation as follows (Annual Report, p. 5):

Trend during

Except for a stiffening toward the close of the year, resulting in an increase of rates in some districts by one-half of 1%, the discount rates prevailing at federal reserve banks have been nearly stationary. . . . There has been no occasion to establish new or special rates designed for the accommodation of particular industries or districts. . . . Not only the farmers but those engaged in all lines of business and industry, were during the year just closed unusually strong and independent from a financial standpoint; and partly because of this fact and partly by reason of the prevailing ease in the money market, the influence of the federal reserve banks upon rates was indirect and potential rather than dominant.

The Board also pointed out that the official rates in European centers were uniformly above the 4% rate at the New York Reserve Bank. The discount rates in effect May 31, 1917, were as follows:

Rates early in 1917

In considering the development of the discount rates under the Federal Reserve System down to the date of the above table several points must be borne in mind. The reduction of reserve requirements by the Reserve Act itself and the heavy importation of gold from abroad so eased the American credit situation that heavy surplus reserves accumulated. Furthermore, reserves even of the member banks were only incompletely centralized in the reserve banks while at the same time relatively few state banks had joined the system. Hence, except during the flurry in the call-money market toward the close of 1916, and during the "Liberty Bond" campaign in 1917, there had been comparatively little dependence on reserve banks by member banks, and, as the Board itself remarks in its report, the effect of the official rates was potential rather than dominant. To what extent the reserve banks will be able to dominate the credit situation further experience must determine.

Another circumstance worthy of note in view of the controversy over single-name versus two-name paper is the discriminatory rate in favor of the trade acceptance. For all maturities the rates on this form of paper range below the rates for corresponding classes of eligible single-name paper. The equally favorable treatment of satisfactory commodity paper has already been of great benefit in the marketing of the staple crops.

Credit situation unusual

Discrimination in favor of special forms of paper