The herald. [volume] (New Orleans, La.) 1905-1953, 1922-11-09

the reservoirs falls. In 1920 the reservoirs ran
very low, because the farmers and business men
made unusually heavy demands upon them at
time when they had already been drawn down by
the needs of the government
The supply of water in a reservoir becomes
useful when II is distributed through the water
mains. The supply of credit in a federal reserve
reservoir becomes useful when il is distributed
through the member banks. But just as II Is the
individual and not the reservoir that draws the
water, it is the business man or the farmer
who takes the first step which may result in
drawing upon the reservoir of credit.
For example:
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 he asks his local
Austin bank for loan. This is the first step just
referred to-
The Austin bank satisfied with the grocer's
credit makes him ninety-day loan on his note
The grocer buys the flour, and proceeds to sell
1t barrel by barrel to his customers AS his Gus
toners pay their bills, the grocer accumuiates
money with which he gays Off his note
In ordinary times and in slack seasons 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 depositors for one reason
VI are having TO draw down their
deposits If the Austin bank Is to continue to lend
money and pay its depositors. Ii in turn will have
to borrow.
Before the Federal Reserve system was In oper-
alton, the Austin bank would have had to ask for
a loan from some larger bank with which 1t had
an account Ordinarily the loan could be obtained
But II money happened to be scarce the larger
bank might be compelled to refuse to lend be-
cause Its own resources were running below what
nQQd m oil
toners.
Now, however, a member of the Federal
Reserve system, the Austin bank is In a quite
different position. 1t has bank Of its own the
Federal Reserve bank of Dallas, to which II goes
as matter Of right given 1t by law. 1t sends to
the Federal Reserve bank of Dallas the grocer's
note and other notes upon which II 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 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 published rate applying uniformly to all men,
Der banks in its district and is often quite differ
ent from the 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 bank sends 1t back to the Austin
member bank and receives payment for II. 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 is
typical Of the vast mass Of looms which enter into
the operations Of the Federal Reserve system
Suppose, for instance, that instead of the grocer
the borrower is dry goods merchant in Butte a
hardware dealer In Chicago q steel maker in
birmingham, lumberman in Seattle or an
exporter In New York-each responsible bust
ness man in good financial standing locally
Suppose. again, that the borrower is anyone
who owns United States government bond or
note. and puts 1t up at his bank as security for
loan. Such borrowings from member banks.
whether large or small can be borrowed upon by
the member banks at their federal reserve banks
If they are within ninety days of falling due II
was loans Of this Sort redscounted at the federal
reserve banks that enabled millions of people
throughout the United States to subscribe TO the
Liberty and Victory loans.
Just such reasons prompted the Austin
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 point that II must be replen-
ished II the federal reserve bank is to continue
to lend
This country Is so vast that one section of II
is apt to have credit to spare when another Sec
ton 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 1t. federal reserve bank renews
its Iower to lend by borrowing from another fed.
eral reserve bank In district where the demand
for credit Is smaller 1t puts up as security the
notes upon which 1t has lent to its member banks.
In other words, one Of the twelve reservoirs I'm
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 Is the kind of beneficial co-operation be-
tween agricultural and Industrial districts that
actually took place in the difficult years of 1920
and 1921. At times. when agricultural districts
such as Richmond, Atlanta, ST. Louis. Mime
apols, Kansas City or Dallas, having received
arge amounts Of money in payment for their
,rops, had surplus credit they lent it to indus
rial districts which were In need of It. At other