Licking Valley courier., 1922-11-02
IN COUNTY, KEN rUcKY, THURSDAY, NOVEMBER 2, 1922
<E8SgS

in storage they have lending power in storage
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
cmade 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 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:
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 loan This is the first step Just
referred to-
The Austin bank satisfied with the grocers
credit, makes him nnety-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 accumulates
money with which he LAYS off his note.
In ordinary times and in slack seasons, banks
own resources are sufficient for It's 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 O time when
many people are asking for loans to carry on their
business. Or perhaps its depOsltors 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 depOstors, 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
laru honly xuith uhioh II hod
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 Its own resources were running below what
1t might need to meet all the demands of It's Gus
toners.
Now. however, as a member of the Federal
Reserve system, the Austin bank is in a quite
different position. It has bank Of its own, the
Federal Reserve bank of Dallas, to which 1t goes
as a 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 1t has already
made loans. With these as security, the Austin
bank asks the federal reserve bank for 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, 1t 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,
ber banks in its district and is often quite differ
ent from the rate the member bank charges its
own customers. The rate member bank charges
Itc fc dato cuk 20, ctot Iou
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 1t. 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 loans 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, a steel maker in
Birmingham, lumberman in Seattle, or an
exporter in New YUrk-each responsible bust
ness man in good financial standing locally
Suppose, again, that the borrower is anyone
who owns United States government bond OF
note, and puts 1t up at his bank us 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
IL they are within ninety days Of falling due. Il
was loans Of this sort, rediscOuned at the fedora
reserve banks, that enabled millions of peOpl,
throughout the United States to subscribe to tn,
Liberty and Victory loans.
Just such reasons as prompted the Austlr
member bank to borrow from its federal reserv,
fnIa al
to borrow. borrowings by many member banks
representing loans that they have already mad,
to their customers, sometimes draw down tn,
reservoir to such point that II must be replen
lshed II the federal reserve bank is to contlnu,
to lend
This country is so vast that one section Of |
Is apt TO have credit to spare when another sec
ton needs credit All that is necessary is Qulcl
and easy means for bringing them together Tn
Federal Reserve system furnishes the means an
has often used It, A federal reserve bank renew
It's EOwer to lend by borrowing from another fed
eral reserve bank in district where the deman
for credit Is smaller. 1t puts up as security tn
notes upon which 1t has lent to its member banks
In other words, one of the twelve reservoirs 4
the countrywide system pipes in some Of the SUI
plus credit from one or more of the other resel
volrs and so renews Its power to lend.
This is the kind of beneficial cooperation bC
tween agricultural and industrial districts thO
actually took place in the difficult years of 1872
and 1921. At times, when agricultural district
such as Richmond, Atlanta, ST. Louis MINI,
apolis Kansas City or Dallas, having receive
large amounts Of money in payment for the
crops, had surplus credit they lent It to lndu
trial districts which were in need of It. At othC
times, when the situation changed and industriI
districts such as Cleveland Boston, New York
Philadelphia having received payment for good