The Holly chieftain., 1922-10-26

Very closely connected with the power of the
federal reserve banks to lend is their power to
Issue currency-federul 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
IL. JUST as the customer who makes loan at his
bank may need to draw out part all of it In
currency, so member bank in making loan at
FEDERAL reserve bank may need to draw out part
or all OF 1t In currency. The power to issue cur
rency insures 70 everyone who has deposit In d
solvent bank the ability to draw 1t out In cur
rency That explains why this country never
again need have II money panic such as that OF
1907; explains, indeed, why there was sug
gestion OF money panic in the difficult months
of 1920
Look AZ 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
1t is redeemable In gold at the treasury In Wash
ington Federal reserve notes also redeemed
in gold at any federal reserve bank.
Each federal reserve bank is required by law
to set aside security, dollar for dollar, agains,
the notes 1t issues. The security may be either
gold, or borrowers paper very shortly to be paid
representing either loans for the production or dis
trfbution of goods and farm products, 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 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 loan. In just the same way. when
member bank needs currency, 1t 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 loan with it. Just does
member bank at the federal reserve bank That
is how the total amount of currency in circula
tion decreases. AS federal reserve notes for which
there Is no demand accumulate in n federal reserve
bank, they are either destroyed put away in
its vaults until some need calls them out again.
Whether the volume of federal reserve notes In
circulation Increases decreases depends not
upon the initiative of the federal reserve banks
but upon the needs of the member banks. Their
needs in turn decided by the needs of their
customers. AS in drawing water from reservoir
it is the individual who takes the first step.
The plan of organization which the law lays
down for the Federal Reserve system does two
things. 1t provides nationwide system knit
together that nationwide resources may work as
unit in national emergency. or be mobzed to
meet local emergency too severe for local re-
of local self-government in banking. These are
principles with which Americans are familiar In
the working of the federal and state governments
under the Constitution
The country is divided into twelve districts
each with 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 like
other banking institutions. The stockholders are
the member banks. Its nine directors are resi-
dents Of the district. some from the cities an(
some from the country. Three are appointed by
the federal reserve board in Washington, and the
other six elected by the member banks eacf
having one vote. In voting, the banks are divided
into three groups, each of which eiects two di
rectors These groups composed, respectively
of the smallest banks. the middlesized banks ant
the largest banks Only three Of the directors car
be officers or directors of other banks. AT leas
three, and usually majority, are representativ,
of industry, commerce and agriculture. For thes,
are the interests which, through the member
banks the system is intended particularly tt
serve and protect.
These men are responsible for the management
and control of the federal reserve bank The,
elect its officers. determine the policies unde
which it operates and establish, subject to ap
proval by the federal reserve board, the rate O
discount it charges. All profits. after settn,
aside the surplus provided in the law and afte
paying the melnDer DankS SIX per cent dividend
their stock, go to the United States treasur,
and are used to reduce the national debt
The co-ordlnating body is the federal reserve
board In Washington, which is made up of sever
members-fve who are appointed by the Presl
dent and devote their entire time to the work
together with the secretary of the treasury ant
the comptroller of the currency.
The federal reserve board however. is not a,
operating body Except for Its power to requir,
one federal reserve bank to lend to another
federal reserve bank, its powers are amos
entirely supervisory. But the board does not pas
upon the individual loans which federal reserv,
bank makes to a member bank. The board itself
of course cannot lend money because it has non,
to lend
In their right to borrow at federal resery,
bank all member banks, large small are equal
The law says that federal reserve bank shal
make each member bank such loans as may b,
safely and reasonably made.
The Federal Reserve system provides thu
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