Essex County herald. [volume] (Guildhall, Vt.) 1873-1964, 1922-10-26

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 whe it is distributed through the water
mains. THE supply of credit in a federal reserve
reservoir becomes useful when it is distributed
through the member banks. But just as it is the
individual and not the reservoir that draws the
water, so 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:
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 grocer's
credit, makes him a ninety-day loan on his note.
The grocer buys the flour, and proceeds to sell
it 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 depositors 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
a 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 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. 1t has a bank of its own, the
Federal Reserve bank of Dallas, to which it 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 it 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 a 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 it 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 a 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
u, federal reserve bank sends it 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
beeh9 able to carry on his business, ,.,&| A..
~ the simple transaction of the Austin grocer is
n typical Of the vast mass of loans which enter into
~ the operati9nsA 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 a responsible bust
I, ness man in good financial standing locally.
Suppose; again, that the borrower is anyone
a who owns "a United States government bond or
- note, and puts, it 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
throughout the United States to subscribe to the
Liberty and Victory loans.
Just such reasons as prompted the Austin
member bank to borrow from it's 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 a point that it must be replen-
ished II the federal reserve bank is to continue
to lend. 49,. d, sa ~''
This country is so vast that one section of 1t
is ait to have credit to spare WREN 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
2 has often usedrit. A federal reserve bank renews
! It's Eower to lend by borrowing from another fed
y, eral reserve bank fn "a district Where the demand
for. credit is, smallerAtIt puts up 'as security the
notes upon which it 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 is the kind of beneficial cooperation 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
a.oUo Iyoneoo Citv n T. Dallas having rpcnIvad