The Red Cloud chief. (Red Cloud, Webster Co., Neb.) 1873-1923, November 02, 1922, Image 8
RED CLOUD. NEBRASKA. CHIEF .' FEDERAL RESERVE BANKS ffl i JVM i I'M it 4 f 5 f J FiiHlHWiHXIBHHBKiSaBBana HOW THE SYSTEM DOES FOR BANKS WHAT THE BANKS DO FOR CUSTOMERS termmlfesai W UK imftsliiK ly the United States senate the other day of a Joint resolution (S. J. lies. 12.'1S) nutlior Izlnj; the Federal Reserve hunk of St. Louis to erect n bullillnK to cost S100,(M)0 for its brunch bank at Little Rock, Ark., brought out In debate the fact that the Arkan sas bank had loaned $:,SS.OOO. (XX) in the years 101 0-121 and had made net prollts of $1,011,000. These federal reserve banks are Koine un all over the country a fact which shows the magnitude and Importance of the system. In response to a public demand for Information about the Federal Reserve nankins system and Its operations the following olllclal statement is presented: vw A federal reserve bank docs for banks almost exactly what banks do for their customers. It receives money on deposit from such banks as have become members of the Federal Reserve system, and lends to them. All national banks are members of the Federal Reserve system, and many state banks and trust companies have become members also. Every member bnnk Is obliged by law to keep with Its federal reserve bank an amount of money which bears a certain proportion to the deposits It has received from its customers. This is called a "reserve," and as the federal reserve banks keep the reserves of their members they are called "reserve" banks. At times, member banks borrow from their federal reserve bank Just as Individuals borrow from their own bunk. Individuals cannot deposit money with a federal reserve bank, or borrow from if; their i elation with It Is through the member banks. Refore the Federal Reserve system was In oper ation, each Individual bank stood virtually alone. Tills was safe enough as Jong as things went well Jn the business world, but even then the machinery of banking was so cumbersome that It often worked badly. ' In order to meet the requirements of law and to pay depositors, all banks used to keep large 'amounts of gold and. currency on hand and most of them also kept money on deposit with other banks in the larger cities. When all went well, jtho money on deposit with the city banks could be withdrawn In currency whenever It was wanted. Rut when, as sometimes happened, busi ness or banking conditions were disturbed and suspicion was In the air, the banks were anxious to Increase the amount of cash on hand lest an unusual number of depositors might want to with draw their money. And it was at those times that the city banks were least able to furnish cash. For the available supply of currency was limited, and there was no quick way of Increasing It. The limited supply of currency led to the panic of 15)07. For, moved by apprehension, almost every one of the twenty-four thousand banks sought, for Its own protection, to withdraw such currency as It could from other banks and pay out as little as possible to its depositors. Though emergency measures were finally taken, they were too late to prevent the coming of trouble, and the existing "banking machinery fell apart Into thousands of separate units. Each bunk had to trust largely to Its own cash resources, because, however willing, the other Ibnnks felt they could not give up much of their .cash, for by doing so they might impair their abil ity to meet the pisslblp needs of their own cus tomers. Each bank, In seeking to protect Itself, 'necessarily weakened the entire banking strac ture. The defenses were weakest when the 'danger was greatest. ' The result was that every few years n money ('panic occurred, bringing disaster and depression. These money panics from which the United States suffered, and which the organization of the Fed jeral Reserve system now prevents, were, of course, ,'qulte different from the commercial crises from ;whlch every country occasionally suiters. , Under the Federal Reserve system there Is n quick, certnln, automatic way by which the banks that are members of the system help one another, 'in good times and bad. This Is Important to every 'business man, every farmer, every working man, 'every citizen. It is the result of organization the !klnd of organization that makes a system of reservoirs In a community better than many sep inrate wells. It Is appropriate to think of the Federal Reserve Iftysteni as exactly that a system of reservoirs. There are twelve of these reservoirs, tho federal reserve banks of Roston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, .Minneapolis, Kansas City, Dallas and San Fran ,:!seo each serving the needs of tho member ilrnnks In Its own federal reserve district. In each 'at these reservoirs credit Is stored up, and from It, its the need arises, credit Is supplied to tho mem jber banks and through them to their customers, including not only business men and farmers, but 'other banks as well. The process Is much like the storing up of wuU-r In a city reservoir, from which It Is supplied to houses and their occupants. It may ho thought strange thnt such a thing as credit, which In this sense Is tho power to make loans, can bo stored up. Rut the fact Is, a great lenl of It Is stored up In the federal reserve reser voirs. For, as wo havo seen, tho member banks deposit In tho Federal Reserve banks most of tho gold they formerly kept In their own vaults and isonio of the money they used to keep on deposit with other banks. And It Is tho gold which fed leral reserve banks requiro In this and other ways Hint gives them the ability to make loans and issue currency. i Tho provisions of the law nro such thnt tho federal, reserve banks can make loans to nn lamount between two nnd three times as much as the gold they have. So, having a supply of gold 4 H In storage, they have u lending power In storage also. As this lending power Is used, the level In tho reservoirs falls. In 11)20 the reservoirs ran very low, because the farmers and business men made unusually heavy demands upon them at a time when they had already been drawn down by the war needs of the government. The supply of water In a reservoir 'becomes useful when It Is distributed through the water mains. The supply of credit In a federal reserve reservoir becomes userul when It Is distributed through the member banks. Rut Just as It Is the Individual and not the reservoir that draws the watw, so It Is the business man or the farmer who takes the first stop which may result In drawing upon the reservoir of credit. For example: A grocer In Austin, Texas, wishes to buy fifty barrels of Hour. He has not enough money In the bank with which to pay for It so he asks his local Austin bank for n loan. This Is the llrst step Just referred to. The Austin bank, satlslled with the grocer's credit, makes him a ninety-day loan on his note. The grocer buys the Hour, and proceeds to sell It barrel by barrel to bis customers. An bis cus tomers pay their bills, tho grocer accumulates money with which he n.v off his note. In ordinary times and In slack seasons, a bank's own resources are sulllclent for Its customers' needs. Rut perhaps the Austin bank, which Is a member of the Federal Reserve system, Is asked to make the loan to the grocer at a time when many people are asking for loans to carry on their business. Or perhaps Its depositors for one reason or another nro having to draw down their deposits. If the Austin bank Is to continue to lend money and pay its depositors, it in turn will have to borrow. Refore the Federal Reserve system wns In oper ation, the Austin hank would hnve had to ask for a loan from some larger bank with which It had an account. Ordinarily the loan could be obtained. Rut if money happened to be scarce the larger bank might bo compelled to refuse to lend, be cause Its own resources were running below what It might need to meet all the demands of Its cus tomers. Now, however, as a member of the Federal Reserve system, the Austin bank Is In a quite different position. It has u bank of Its own, the Federal Reserve bank of Dallas, to which It goefl as a matter of right given it by law. It sends to tho Federal Reserve bank of Dallas the grocer's note and other notes upon which It has already made loans. With these ns security, the Austin bank asks the federal reserve bank for a loan. This Is the second step In drawing upon the reservoir of credit, and follows the llrst step which the Individual tool: when he borrowed front his bank. Roth steps must be tnken before tho federal reserve bank lends a dollar. The Dallas Federal Reserve bank examines tho notes to see whether they are sound and accept able, and of the kind the Inw permits It to lend upon. Relng satlslled, It makes the loan to the Austin member bank. This Is called "rediscount Ing"; and the rate i)f Interest the federal reserve bank charges Is called the "discount rate." Tills Is a published rate, applying uniformly to all mem ber banks. In its district, and Is often quite differ ent from tho rate the member bank charges Its own customers. The rate a member bank charges Its customers Is determined, subject to state law, largely by local business conditions and local banking custom. Later, when the grocer's note falls due, the federal reserve bunk sends It back to the Austin member bank and receives payment for It. The Austin bank In turn receives payment from the grocer nnd gives litm bilck bis note. Tims the circle If. completed. Meanwhile, the grocer has been able to carry on his business, The simple, transaction of the Austin grocer is typical of the vast mass of loans which enter Into the operations of the Federal Reserve system. Suppose, for instance, that instead of tho grocer, the borrower Is a dry goods merchant in Rutte, a hardware dealer in Chicago, n steel maker In Rlrmlngham, a lumberman In Seattle or an exporter In New York each a responsible busi ness man In good financial standing locally. Suppose, again, that the borrower Js anyone who owns a United Stntes government bond or note, and puts it up at his bank as security for a loan. Such borrowings from member bnnks, whether large or small, can bo borrowed upon by tho member banks at their federal reserve banks if they are within ninety days of falling due. It was loans of this sort, rediscounted at the federal reserve banks, thnt enabled millions of people throughout tho United States to subscribe to the Liberty and Victory loans. Just such reasons as prompted the Austin member bank to borrow from Its federal reserve bank, sometimes cause a federal reserve bank to borrow. Rorrowlngs by many member banks, representing loans that they have already made to their customers, sometimes draw down the reservoir to such a point that It must bo replen ished If the federal reserve bank Is to continue to lend. This country Is so vast that one section of It Is apt to have credit to spare when another sec tion needs credit. All that Is necessary is a quick and easy means for bringing them together. The Federal Reserve system furnishes the means and has often used it. A federal reserve bank renews Us power to lend by borrowing from another fed eral reserve bank In a district where the demand for credit Is smaller. It puts up as security the notes upon which It has lent to Its member bnnks. In other words, one of the twelve reservoirs In the country-wide system pipes In some of the sur plus credit from one or more of tho other reser voirs and so renews Its power to lend. Tills Is the kind of beneficial co-operation be tween agricultural and Industrial districts that actually too!; placo In tho dllllcult years of lOUO and 1021. At times, when agricultural districts such as Richmond, Atlanta, St. Louis, Minne apolis, Kansas City or Dallas, having received largo nmounts of money in puyment for their crops, had surplus credit, they lent It to Indus trial districts which were In need of It. At other times, when the situation changed and Industrial districts such ns Cleveland, Roston, New York or Philadelphia, having received payment for goods, had sun Ins credit, they lent It to agricultural districts. Very closely connected with the power of tho federal reserve bnnks to lend Is their power to Issue currency federal reserve notes. The power to lend, taken by itself, would be of far less value If the power to Issue currency did not go with It. Just ns the customer who makes a loan at his bunk may need to draw out part or all of It In currency, so a member bank In making u loan at n federal reserve bank may need to draw out part or all of It In currency. The power to Issue cur rency Insures to everyone who has a deposit In a solvent bank the ability to draw it out In cur rency. That explains why tills country never again need have a money panic such as that of 1007; explains, Indeed, why there was no sug gestion of a money panic In tho dllllcult months of ID'.'O. Look at a live-dollar bill bearing tho portrait of Lincoln. On Its face It says that it Is an obligation of the United States; on its back that It Is redeemable In gold at the treasury In Wash ington. Federal reserve notes are also redeemed In gold at any federal reserve bank. Each federal reserve bank Is required by law to set aside security, dollar for dollar, against tho notes It Issues. The security may be either gold, or borrowers' pnp-or very shortly to be paid, representing either loans for the production or dis tribution of goods and farm products, or loans to holders of the United States government securi ties. Tho gold which the law requires a federal reserve bank to maintain as a reserve against Its notes must always bo nt least forty per cent of the amount of Its notes In circulation. These notes get Into circulation and pass out of circulation In much the same way as money Is drawn out of a bank and returned to It. When a ninn needs currency he draws a check on his bank nnd cashes It. If ho has not enough money In the bnnk to meet the check, he may havo to make a loan. In Just tho same way, when n member bank needs currency, It draws and cashes a check on Its federal reserve bank. Per haps tho member bnnk hud to borrow at the fed eral reserve bank for this very purpose. Thnt Is how the total amount of currency In circulation Increases. Oi. the other hand, when n man has more cur rency thnn he needs ho deposits It at his bank and perhaps pays off a loan with It. Just so does a member bank at the federal reserve bank. That Is how the total amount of currency In circula tion decreases. As federal reserve notes for which there Is no demand nccumulute in a federal reservo bank, they are either destroyed or put away in Its vaults until some need calls them out again. Whether the volume of federal reserve notes In circulation Increases or decreases depends not upon the- Initiative of the federal reserve banks but upon tho needs of the member banks. Their needs, In turn, are decided by the needs of their customers. As in drawing water from a reservoir, It is the Individual who takes the first step. The plan at organization which the law lays down for the Federal Reserve system does two things. It provides a nation-wide system so knit together that nation-wide resources may work as a unit in a national emergency, or be mobilized to meet a local emergency too severe for local re sources to cope with. It als preserves the right of local self-government In hanking. These nro principles with which Americans are familiar In the working of the federal and state governments under the Constitution. The country Is divided Into twelve districts, each with a federal reserve bank. In many dis tricts tho federal reserve banks have one or moro branches for the better service of the member minks. Each federal reserve bunk has Its own stockholders, directors, officers and clerks lll:o other banking Institutions. The stockholders: are tho member bnnks. Its nine directors are resi dents of the district, some from the cities and some from the country. Three are appointed by the federal reserve board In Washington, nnd tho other six are elected by the member banks, each having one vote. In voting, the banks are divided into three groups, each of which elects two di rectors. These groups are composed, respectively, of the smallest banks, the middle-sized banks, ami the largest banks Only three of the directors can bo officers or directors of other banks. At least three, and usually a majority, are representative of industry, commerce and agriculture. For these are the Interests which, through the member banks, the system is Intended particularly to servo and protect. These men are responsible for the mnnngement and control of tho federal reserve bank. They elect Its officers, determine the policies under which It operates, and establish, subject t ap proval by the federal reserve board, the rate of discount it charges. All profits, after setting aside the surplus provided In the law and after paying the member banks six per cent dividends on their stock, go to the United States treasury and are used to reduce the national debt. The co-ordinating body is the federal reserve board In Washington, which Is made up of seven members five who are appointed by tho Presi dent and devote their entire time to the work, together with the secretary of the treasury and the comptroller of the currency. The federal reserve board, however, Is not an operating body. Except for Its power to requiro one federal reserve bank to lend to another federal reserve bank, Its powers are almost entirely supervisory. Rut tho board does not pass upon tho Individual loans which a federal reservo bank makes to a member bank. The board Itself, of course, cannot lend money because It has none to lend. In their right to borrow, at n federal reservo bank all member bunks, large or small, are equal. Tho law says that a federal reservo bank shall moko each member bank such lonns us mny bo snfely and reasonably made. Tho Federal Reservo system provides the entire country with a currency resjwnslve to Its varying needs, and thus removes tho danger of a money panic. Moreover, It provides tho entlro country with a great reservoir of credit from which farm and range, forest and mine, factory and store, may recelvo assistance In producing and marketing all the Innumerable goods and wares which go to make up American commerce, Industry and agriculture. They Do a Hundred Calories in About 9i EAT a box of little raisins when you feel hungry, lazy, tired or faint. 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