The Freeman 1972 - The Ludwig von Mises Institute

1972 THE FEDERAL RESERVE SYSTEM 247the System, may legislate at will- the meaning and substance ofthe System will remain unaltered.The Federal Reserve was to a,ccommodateits memher banks withemergency reserves and credits.After 50 years of rapid growth ofgovernment it now holds completepowers over our money and banking.It works with three importantinstruments to suit whatever itspurposes m,aybe at any giventime. In the beginning it hadorat least used - only one. Thiswas the rediscoun.t irnstrumen.t.Rediscount RatePromissory notes, drafts, andbills of exchange, growing out ofactual commercial transactionsand with a maturity not to exceedninety days, accepted by the commercialbanks and then rediscountedwith the Federal Reserve- this constituted, by law, the baseand the boundary for the moneythe Federal Reserve could create.Thus a direct causal connectionwas to be established between themoney supply and the demand formoney. Since the total of commoditybills --rediscounted was supposedto be determined by theintensity of economic life, basingthe money supply on that totalwas supposed to bring about aperfect adjustment of this supplyto the fluctuating "needs of business."This arrangement was tomake money "neutral," smoothlyrendering the vital service of amedium of exchange without itselfaffecting prices.Of course, it did no such thing.The volume of "p.aper" thus offeredthe Federal Reserve forrediscount - and hence the amountof currency and credit it couldfeed into the economy - was determinedprimarily by the rediscountrate which the Federal Reserveitself established and couldchange ,af will. As so often happens,the planners had put thecart before the horse.Also, by 1935, the boundariesin this channel of operations hadbeen materially widened. Thepaper presented to the FederalReserve for advances to its memberbanks no longer had to ariseout of commercial transactions. Itcould even be government securities.If the notes, drafts, or billsof exchange had been drawn "foragricultural purposes," they couldnow have a maturity of ninemonths instead of three. Not onlybanks, but individuals, partnerships,and corporations also hadbeen given access to the discountingfacilities of the System. Finally,in 1942, the Federal governmentwas authorized to borrow upto five billion dollars directly fromthe Federal Reserve. And everyloan the Federal Reserve Systemmade to any borrower, for· any