The fractional reserve system, which permits the member banks as a group to expand the supply of credit by a multiple of the excess reserves held by them, and conversely compels a severalfold contraction of credit whenever reserves are reduced, enables the Reserve authorities to exercise control over the total volume of bank credit by supplying or withdrawing reserves.
The instruments of quantitative credit control are (1) the discount rate, (2) open market operations, (3) raising and lowering reserve requirements, (4) the float, and (5) moral suasion. The last tool can also be applied in qualitative credit control.
The common characteristic of the quantitative credit control instruments is the impersonality of their operations. Their use is not directed toward particular banks, certain types of loans and investments, or some segments of the economy; it affects rather the availability and cost of credit throughout the economy. Hence, their administration is less cumbersome and more flexible than that of selective controls and, moreover, is less exposed to political pressure from individual sectors of the economy.
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