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

had SURPLUS credit, they lent it to agricultural
districts.
Very closely connected with the power of the
issue c~urrency-federa reserve notes. The power
to lend, taken by itself, would be of far less value
II the power to issue currency did not go with
1t. Just as the customer who makes a loan at his
bank may need to draw out part or all of it in
currency, SO a member bank in making a loan at a
federal reserve bank may need to draw out part
or all Of it in currency. The power to issue cur
rency insureS to everyone who has a deposit in a
solvent bank the ability to draw it out in cur
rency. That explains why this country never
again need have a money panic such as that of
l9O1; explains, indeed, why there was no sug-
gestion Of a money panic in the difficult months
of 1920.
Look at a fve-dollar bill bearing the portrait
of Lincoln. On its face it says that it is an
obligation of the United States; on its back that
it is redeemable in gold at the treasury in Wash
ingtOn. Federal reserve notes are also redeemed
in gold at any federal reserve bank.
Each federal reserve bank is required by law
to set aside security, dollar for dollar, against
the notes it, issues. The security may be either
gold, or borrowers paper very, shortly to be paid
representing either loans for the production or dis.
tributiOn of goods and farm products, or loans to
holders of the United States government securi
ties. The gold which the law requires a federal
reserve bank to maintain as a reserve against its
notes must always be at least forty per cent of
the amount Of its notes in circulation.
These notes get into circulation and pass out
of circulation in much the same way as money Is
drawn out of a bank and returned to it.
When a man needs currency he draws a check
on his bank and caShes it. If he has not enough
money in the bank to meet the check, he may
have to make a loan. In just the same way, wher
a member bank needs currency, it draws and
cashes a check on its federal reserve bank. Per
haps the member bank had to borrow at the fed
eral reserve bank for this very purpose. That is
how the total amount of currency in circulation
increases.
Or. the other hand, when a man has more cur.
rency than he needs he deposits it at his bank
and perhaps pays off a loan with it. Just so does
a member bank ut the federal reserve bank. That
Is how the total amount of currency in circula-
ton decreases. AS federal reserve notes for which
there is no demand accumulate in a federal reserve
bank, they are either destroyed or put away in
its vaults until some need calls them out again.
Whether the volume of federal reserve notes in
circulation increases or decreases depends not
upOn the initiative of the federal reserve banks
but upon the needs .of the member banks. Their
needs, in turn, are decided by the needs of their
customers. As in drawing wafer from a reservoir
it is the individual who take the first step.
IS The plan of organization which the law lays
down for the Federal Reserve system does two
things. 1t provides a nationwide system so knit
together that nationwide resources may work as
a unit in a national emergency, or be modified tc
meet a local emergency too severe for local re
sources to cope with. 1t also preserves the right
of local government in banking. These are
principles with which Americans are familiar il
the working of the federal and state governments
under the Constitution.
The country Is divided into twelve districts
each with a federal reserve bank. In many dis
trictS. the federal reserve banks have one or more
branches for the better service of the member
banks. Each federal reserve bank has it's owl
stockholders, directors, officers and clerks likt
other banking institutions. The stockholders are
the member. banks. Its nine directors are resi-
dents of the district, some from the cities ant
some from the country, Three are appointed by
Che federal reserve. board in Washington, and the
other six are elected by the member banks, eacl
having one vote. In voting, the banks are divided
into three groups, each of which elects two Ill
rect6rs. These groups are composed, respectively
of the smallest banks, the middle-sized banks, an,
the largest banks. Only three of the directors cal
be officers or directors of other banks. At leas
, three, and usually a majority, are Representative,
of industry, commerce and agriculture. For thes,
are the interests which, through the membe
banks, the system is intended particularly t.
serve and protect.
These men are responsible for the management
and control of the federal reserve bank. The.
elect it's officers, determine the policies unde
which 1t operates, and establish, subject to ap
proval by the federal reserve board, the rate O
discount 1t charges. All profits, after settin,
aside the surplus provided in the law and afte
paying the member banks six per cent dividend
on their stock, go to the United States treasur,
and are used to reduce the national debt.
The co-ordlnating body is the federal reserv,
board In Washington, which is made up of sever
members-ive who are appointed by the PresI
dent and devote their entire time to the work
together with the secretary of the treasury ant
81 the comptroller Of the currency.
q, The federal reserve board, however, is not al
operating body. Except for its power to requir,
II, one federal reserve bank to lend to anothel
federal reserve bank, Its powers are almos
entirely supervisory. But the board does not pas!
upon the individual loans which a federal resery,
> bank makes to a member bank. The board itself
of course, cannot lend money because 1t has non,
to lend. '..
81, In their right to borrow at O federal reserv,
bank all member banks, large or small, are equal
The law says that a federal reserve bank shall
make each member bank such loans as may b.