America's Money Machine

122 PART II / THE GREAT REVERSAL
ofnotes made impossible any 1 to 1 correspondence between the official
rediscount rate and the open market rate.
"Indeed," the Board concluded, "the observations of the Federal Reserve
Board and the experiences of the Federal Reserve banks make it
certain that the Federal Reserve banks and the Federal Reserve Board can
not adequately discharge their function of fixing rates with a view of
accommodating commerce and business by the simple expedient of any
fixed rate or mechanical principle."4
The year 1922 marks, in a way, a turning point in Federal Reserve
policy. Henceforth the Reserve began quietly to abandon reliance upon
the discount rate as a modifier ofthe economic climate and to put its faith
and money into open market transactions in which, instead of relying
upon the ebb and flow of commerce to bring expansion or contraction
of bank credit, it attempted to influence that ebb and flow by forcing
credit into the economy-or conversely, withdrawing it-by going into
the market and either bidding for paper or offering it for sale.
Closely connected with the failure of the Federal Reserve to develop
as a financial leader during these earlier years, through the use of the
discount rate, was the withering of the acceptance as a financial instrument.
The trade acceptance-that is, the draft drawn by a seller ofgoods
upon the buyer, and accepted by him-simply did not fit the American
way of doing business and it never developed to any degree. In its place
it was hoped that the banker's acceptance would prove more popular, and
considerable effort was devoted to promoting this form ofpaper, and the
Federal Reserve banks, in their eagerness, went to numerous questionable
practices, including favoritism and straining their authority. The
banker's acceptance differed from a trade acceptance in that the acceptor
was a bank rather than the buyer ofthe goods. It was objectionable in the
eyes of many authorities on the subject, principally for the reason that it
permitted a weak creditor, or a creditor using funds for purposes that
were not for business or commercial purposes, to obtain the funds
through the credit of a bank; and encouraged banks, by the temptations
of profit, to lend their credit beyond their capacity.
Despite these objections the Federal Reserve continued to exert its
influence to the expansion of bankers' acceptances, but balked when a
private New York bank applied for a ruling that would have served,
practically speaking, to permit it to issue a line of credit to the French
government for the purchase ofmunitions, with the privilege ofrefinancing
itselfat the New York Federal Reserve bank. It was the Treasury, and