Member banks must follow federal leads

If federal reserve banks are to be able to secure a larger measure of stability in American business, they must, like the Bank of England, be able to induce the banks of the country to follow their leadership. This is simple enough in periods of tight money when the other banks are dependent upon the federal reserve banks for funds. It is more difficult in periods of prosperity when each individual bank will feel itself competent to go ahead, extending its credits as rapidly as it pleases, without regard to the ultimate effect of a general credit expansion upon the welfare of the country as a whole. The open market operations of the federal reserve banks, if they can be developed on a sufficient scale, will put them in a position where they can say to the thousands of other banks in the country: “We come to your relief in time of stress by taking off your hands commercial paper which you are no longer able to hold, and by supplying you with funds so that you may continue the operations so necessary to the economic life of your own community. Now, when everything seems prosperous, we must ask you to take off our hands commercial paper which we think had better be held by you than by us. It is better that your surplus lending power be absorbed for the while in the holding of this paper than that you should be free just now to expand your credits further at low interest rates.”