, 1922-10-26

also. AS this lending power Is used, the level in
the reservoirs falls. In 1920 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 useful when 1t is distributed
through the member banks. But just as 1t Is the
individual and not the reservoir that draws the
water, so 1t is the business man or the farmer
who takes the first step which may result in
drawing upon the reservoir of credit.
For example:
A grocer In Austin. Texas. wishes to buy fifty
barrels of flour. He has not enough money in the
bank with which to pay for it so he asks his local
Austin bank for a loan. This Is the first step just
referred to.
The Austin bank, satisfied with the grocers
credit, makes him a nlnety-day loan on his note.
The grocer buys the flour, and proceeds to sell
IL barrel by barrel to his customers. AS his Gus
toners pay their bills, the grocer accumulates
money with which he lays off his note.
In ordinary times and In slack seasons, a banks
own resources are sufficient for its customers
needs. But 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 d~epositors for one reason
or another are having to draw down their
deposits. If the Austin bank is to continue to lend
money and pay its depositors, il in turn will have
to borrow.
Before the Federal Reserve system was in oper-
alton, the Austin bank would have had to ask for
n loan from some larger bank with which it had
an account. Ordinarily the loan could be obtained.
But If money happened TO be scarce the larger
bank might be compelled to refuse to lend, be-
cause It's own resources were running below what
1t might need TO meet all the demands of its Gus
toners.
NOW, however. as n member of the EadaroI
Reserve system, the Austin bank is in a quite
different position. 1t has a bank of its own, the
Federal Reserve bank of Dallas. to which 1t goes
as a matter of right given it by law. 1t sends to
the Federal Reserve bank of Dallas the grocer's
note and other notes upon which 1t has already
made loans. With these as 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 first step which
the individual took when he borrowed from his
bank. Both steps must be taken before the federal
reserve bank lends q dollar.
The Dallas Federal Reserve bank examines the
notes to see whether they are sound and accept.
able. and of the kind the law permits 1t to lend
upon. Being satisfied, it makes the loan, to the
Austin member bank. This is called "rediscount-
ing; and the rate of interest the federal reserve
bank charges is called the Discount rate" This
is n published rate, applying uniformly to all mem
Der banks in its district. and is often quite differ
ent from the rate the member bank charges its
own customers. The rate n 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 bank sends II back to the Austin
member bank and receives payment for it.. The
Austin bank in turn receives payment from the
grocer and gives him back his note. Thus the
circle Is completed. Meanwhile, the grocer has
been able to carry on his business.
The simple transaction of the Austin grocer IL
tyDICnl of the ynSt mass of lO0nS which pntqr into
the operations of the Federal Reserve system.
Suppose, for instance. that instead of the grocer.
the borrower Is a dry goods merchant in Butte, a
hardware dealer in Chicago, a steel maker in
Birmingham. a lumberman in Seattle, or an
exporter In New York-each u responsible bust
ness man In good financial standing locally.
Suppose. again, that the borrower is anyone
who owns a United States government bond or
note. and puts II up at his bank as security for "A
loan. Such borrowings from member banks,
whether large or small, can be borrowed upon by
the member banks at their federal reserve banks
IL they are within ninety days of falling due. 1t
was loans OF this. sort, rediscounted at the federal
reserve banks, that enabled millions OF people
throughJ.. .ha United States to subscribe 10 the
Liberty and VIctort foanS
Just such reasons as prompted the Austln
member bank to borrow from its federal reserve
bank. sometimes cause a federal reserve bank
to borrow. Borrowings by many member banks,
representing loans that they have already made
to their customers. sometimes draw down the
reservoir to such n point that 1t must be replen-
ished II 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 n quick
and easy means for bringing them together. The
Federal Reserve system furnishes the means and
has often used II. A federal reserve bank renews
It's Iower to lend by borrowing from another fed
ernl reserve bank In n district where the demand
for credit Is smaller. 1t puts up as security the
notes upon which II has lent to Its member banks.
In other words. one of the twelve reservoirs In
the countrywide system pipes In some OF the sur
plus credit from one or more OF the other reser-
voirs and so renews Its power TO lend.
This IL the kind of beneficial cooperation be
tween agricultural and Industrial districts that
actually took place In the difficult years OF 1920