The Richmond Virginian. (Richmond, Va.) 1910-1920, 1917-10-07
HOW RESERVE BANK
AID NATIONS LOANS
Gov. Strong Says Principal Part OF
Work is to Keep Money Market
Steady.
CENTER OF CREDIT MACHINE.
Head OF Local Institution Describes
Task as Running the Country's
General Ledger"


banks play in the fiotation of govern
ment loans was explained in detail by
/ Benjamin Strong. governor of the Fed
eral Reserve bank. of New York. in an
address before the American Bankers
association at their convention In At
I lantic City last week. The actual ma
chinery for selling bonds, keeping
proper records OF their issue. and
ma king deliveries. was not, he said.
the most important feature OF the
work. OF far greater Importance was
the problem of so arranging the huge
| financial operations that they might
| be conducted without disturbance to
the money markets and consequently
causing Il Decentralization of business.
Were / asked to state in the few
est words the function Of the Reserve
system in relation to government
financing" said Governor Strong. Il
would say that the Reserve banks
keep the books of bank reserves and
of government credits for the entire
country: In a banking sense they run
the general ledger.
! THE amount of banking accommo-
| dations required in any we'll organized
country may be said roughly to COR
I respond to volume of the country's
/ busineas. AS business increases. bank
/ loans and deposits increase in some
what like proportion. AS business de-
clines. Liquidation takes place, bank
! loans and DEPOSITS 90 down, and the
! proportion Of reserve to deposits in-
! creases. As an illustration of this
formula, take our own experience in
the last few years. When the war
( hfnt<a an, al. 80
turbed business, we were flooded with
| war orders, and at the same time
ooqded with gold. Business became
I increasingly active. Bank deposits
and loans increased along with a rapid
! increase in our gold reserves. The
! production of our mills had to be
| apeeded up to meet these increasing
| demands, so at the same time the cir
culation of credit had to be speeded
/ up to finance the increased trade.
Now our government has entered the
war, and is making further demands
| upon our productive capacity. The
/ volume of these demands may be
! gauged--roughiy, it Is true, but still
! with a fundamental accuracy--by the
amount of the borrowings and in
creased tax collections OF the govern
ment, and we must again speed up
the machine of credit TO keep pace
with the machinery of production.
| The Reserve banks form the center
| or hub of this credit machine. and
| will briefly describe how the conduct
| of their operation is actually accele,
! rated when the pressure is applied.
! Draws on New York Balance.
| When the government makes an
! offering of securities, whether of long
| term bonds or short term notes. the
hanks of the country rtnm ediately
realize that their customers or clients
will subscribe TO the offering, and that
they (the banks), will be called upon
to make the payment on the subscrip-
! tions In their respective localities
Banks located outside of New York
4 city, practically all Of which have
money on deposit there, prepare for
! this by drawing on their New York
balances or calling in their New York
loans. and Withdrawing these credit
! balances TO the interior. AS rule,
! they do not take cash, but take credit
/ on the books OF the Reserve bank of
| their district or of their local reserve
| agent.
! This is the first spin OF the wheel.
/. The Federal Reserve Rank OF New
/ York receives from the other eleven
reserve banks a vast sum OF New York
exchange for collection and remittance
/ in advance of each loan being placed.
! It must settle with the other Reserve
! banks every Thursday through the
/ Good Settlement fund maintained in
| Washington. This results in a pull
! on the reserves OF all the banks In
New York city. The checks we col
/ lect from them reduce their reserve
| balacnes at the Federal Reserve Bank
of New York and cause the wide fiuc-
| tuation in excess reserves shown by
the New FORK clearing house state
| ment To meet this drain the men,
! her banks of New York come. to the
Federal Reserve bank and borrow
money in one form or another Some
times other means can also be en-
| ployed to @recoup their reserves For
! example, at the time of the last clan.
i the Federal Reserve BANK of New
York purchased from the British gov
/ eminent $4,000 900 of gold In
period of two weeks, and In addition
! received payment in gold OF certain
| International obligations amounting to
! over s5o,00o,000 which matured on
June 90. All of this gold came to
| the Federal Reserve Bank of New
/ York. but was for the credit of large
number of New York banking institu-
ton. There reserves were imme diately
j built up and, to, that exetent. the drain
was offset.
Use Paper to Settle balances,
/ "A further means of relieving the
loss Is to offset it by tnese drafts from
/ the interior. The reserve accounts of
the mem bers in New York are restor-
! ed by the New York bank rediscount-
| ing their paper. II any considera HE
amount of reserves is moved to the
other reserve banks and the amount
of these discounts becomes sufficient
to impair the reserve position OF the
Federal Reserve Bank of New York.
then IL can simply turn over it's port
. folio in part to those reserve banks
which are correspondingly strength
, ened. Expressed differently, instead
of selling balances through the Gold
settlement fund viii. gold. we would
in that case settle our debit balances
by use OF paper out OF our portfolio.
apportioning il with due regard to tho
reserve position of each, of the other
reserve banks. This plan for speedy
and almost automatic transfers OF
credit has not yet been put into op-