The herald. [volume] (New Orleans, La.) 1905-1953, 1922-11-09
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, These federal reserve banks are
going up all over the country-a
fact which shows the magnitude and Importance
of the system In response TO public demand for
Information about the Federal Reserve Banking
system and its operations the following official
statement Is presented:
A federal reserve bank does for banks almost
exactly what banks do for their customers. 1t
receives money on deposit from such banks as
have become members of the Federal Reserve
system. and lends to them. All national banks
are members Of the Federal Reserve system, and
many state banks and trust companies have
become members Also Every member bank Is
obliged by law to keep with its federal reserve
bank an amount of money which bears certain
proportion to the deposits 1t has received from
its customers. This is called reserve" and as
the federal reserve banks keep the reserves OF
their members they are called reserve" banks
At times member banks borrow from their federal
reserve bank Just as individuals borrow from their
own bank. Individuals cannot deposit money
with q federal reserve bank, or borrow from 1t;
their relation with 1t is through the member
banks.
Before the Federal Reserve system was In oper-
alton, each individual bank stood virtually alone.
This was safe enough as long things went well
in the business world but even then the machinery
of banking was so cumbersome that 1t often
worked badly.
In order to meet the requirements of law and
to pay depositors all banks used to keep large
amounts of gold and currency on hand and most
of them also kept money on deposit with other
banks in the larger cities. When ell went WELL
the money on deposit with the city banks could
be withdrawn in currency whenever 1t was
wanted. But when, as sometimes happened. busi-
ness or banking conditions were disturbed and
suspicion was In the air, the banks were anxious
to increase the amount of cash on hand lest an
draw their money. And 1t was at those times that
the city banks were least able to furnish cash.
For the available supply Of currency was limited,
and there was quick way Of increasing 1t.
The limited supply Of currency led to the panic
of 1907. For, moved by apprehension, almost every
one Of the twenty-fOur thousand banks sought for
Its own protection, to withdraw such currency as
IL could from other banks and pay out as little as
possible to its depositors. Though emergency
measures were finally taken, they were too late
to prevent the coming Of trouble, and the existing
banking machinery fell apart into thousands of
separate units.
Each bank had to trust largely to its own cash
resources, BECAUSE however willing, the other
banks felt they could not give up much of their
cash, for by doing they might impair their abi-
ity to meet the possible needs Of their own Gus
toners Each bank, in seeking 70 protect ITSELF
necessarily weakened the entire banking struc-
ture The defenses were weakest when the
danger greatest
The result was that every few years a money
panic occurred. bringing disaster and depression.
These money panics from which the United States
suffered, and which the organization of the Fed
eral Reserve system now prevents, were, Of course
quite different from the commercial! crises from
which every country occasionally suffers.
Under the Federal Reserve system there Is a
quick certain, automatic way by which the banks
that are members of the system help one another
A. hcl 81
business man. every farmer, every working man,
every citizen 1t is the result Of organization-the
kind of organization that makes a system Of
reservoirs in a community better than many sep
sarate wells
1t Is appropriate to think of the Federal Reserve
system exactly that-a system Of reservoirs
There are twelve of these reservoirs, the federal
reserve banks Of Boston. New York, Philadelphia
cleveland, Richmond, Atlanta, Chicago. st. Louis,
Minneapolis, Kansas City, Dallas and San Fran
cisco-each serving the needs Of the member
banks in it's own federal reserve district In each
OF these reservoirs credit is stored up and from It,
as the need arises, credit is supplied to the men,
Der banks and through them to their customers,
Including not only business men and farmers but
other banks as we'll The process is much like the
storing up Of water in city reservoir, from which
1T is supplied to houses and their occupants
1t may be thought strange that such q thing as
credit, which In this sense Is the power to make
loans, can De stored up. But the fact Is great
deal Of 1t Is stored up in the federal reserve reser
voirs For. as we have seen, the member banks
deposit In the Federal Reserve banks most of the
gold they formerly kept In their own vaults and
some OF the money they used to keep on deposit
with other banks And 1t is the gold which fed
eral reserve banks require in this and other ways
that gives them the ability to make loans and
issue currency.
The provisions of the law are such that the
FEDERAL reserve banks can make loans to an
amount between two and three times as much as
the gold they have So having a supply of gold