The Big Sandy news. [volume] (Louisa, Ky.) 1885-1929, 1922-01-27
Is aepositsa in the nearest Federal re-
The ExtensIon OF Credit.

The Federal Reserve Bank will also
rediscount commercial paper held b,
the member bank. You borrow a thou
sand dollars of your local bank. II II
Is a member of the system 1t can in
dorse that note over to the Federal
Reserve Bank for rediscount. A mem
Der bank finds that its reserve is get
ting too low. It sends a batch OF its
loans to the Federal Reserve Bank
which rediscounts them and puts the
proceeds to the member banks credit
thereby bringing its reserve up to the
required level. So no solvent bank
belonging to the system can be closed
by q sudden run. In a pinch or panic
1t can turn to the Federal Reserve
Bank and get more funds by redis-
counting.
Thus the Federal Reserve System
as the word reserve" implies, is some
thing. to fall back on in an emergency.
or under extraordinary conditions. Only
when the thirty thousand independent
local banks have exhausted their own
power to lend do they turn to the re-
serve system and begin drawing from
lit further lending power by rediscount
| ing their paper. As to its most Inn
portant single function-the redis-
counting function-the reserve system
would In ordinary smooth sailing
times be fairly negligible, mostly just
standing there doing nothing like a
fire engine when there is no fire.
| For example, New York City banks
I belonging to the reserve system now
hold more than $4,000, 100000 OF loans
! and investments. but their rediscounts
at the Federal Reserve Bank of New
York amount to only s230,000, 000. Mon
ely is quite easy and the member banks
in this connection, have little use for
the reserve system. But year ago, be-
! fore liquidation had got well under
way, the Federal Reserve Bank OF New
I Yorks rediscount OF member banks
paper amounted TO nearly 100000
900.
In ordinary smooth sailing times
then, and under sound banking prac-
tice, the Federal Reserve System has
no control over bank credits. The re-
sources of the thirty thousand indie
pendent local banks are sufficient TO
take care OF the legitimate demands
for credit, and those banks go their
own way, managing the extension of
credit according to their own judg-
ment. 1t is only in an emergency, or
under unusual conditions, that the re-
serve system comes powerfully into
play as a factor In controlling bank
credits. That is exactly the time,
may remark in passing, when the ex-
tension of credit ought TO be guided by
sound business judgment and not by
political considerations. Even at such
Al a.. n n n.
not forbid local bank to make any
loan it pleases. They can only say to
member bank that It has already re-
discounted all the paper II Is entitled
to rediscount and they will extend no
additional credit to 1t.
1t should be understood that the
Federal Reserve System is not a CEN
trail bank, like the Bank OF England
or the Bank of France. Congress balk-
ed at the idea OF a central bank, and
set up. instead, twelve Federal Reserve
Banks, one for each of the twelve reg
ions into which the country was d.
vided. 1t also set up at Washington a
Federal Reserve Board with certain
supervisory powers over the twelve
banks. Yet each of the twelve reg
ional banks is a separate corporation
with its own regionally elected man
agement, and in many important re-
spects Independent of the central board
at Washington.
The banking system thus roughly
sketched is probably the best in the
world. Beyond any question 1t meets
the needs OF the United States better
than any other known banking sys-
tenn would. 1t gives the coordination
of banking power and the elasticity to
stand a strain without cracking which
European countries get from their
more centralized systems At the same
time It leaves the banking business in
the hands Of independent local banks,
locally owned and managed, alive to
local needs and conditions--whereas
in Europe generally local banking Is
done by branch Of some huge in
stitution with headquarters in London
or Paris or Berlin which appoints the
local management and lays down rules !
and regulations which sometimes fail
to meet local needs. Our system car
ried us through the great strain OF the
war, the postwar boom and the dras- |
tic defiation. 1t has proved itself and
every sensible informed person knows
II.
The Federal Reserve System was in
to the nation during the war,
yet from one point of view 1t was
launched at an unfortunate time. 1t
got into operation in November, 1914,
three months after the beginning OF
the World War. For good while the
public and even bankers had so many /
other things to think Of that they paid
no particular attention to this new re-
serve system. One year after 1t went
into operation total discounts of all
twelve banks amounted to less than
$50, 100000. Two years after 1t went
into operation total discounts were on
ly 1922 100000. II was after the Unit
ed States got into the war that peo-
pie, including bankers, began to pay
marked attention to the reserve sys-
tenn.
Thus the Federal Reserve Banks
came markedly to the attention Of u
public and bankers under abnormal
war conditions when winning the war
at any cost was the main considera-
ton and other considerations went
more or less by the board. A good
many people, including some bankers,
an entirely erroneous no.
ton of the reserve system, coming to
regard 1t as an institution whose chief
was TO shovel out credit on
easy terms as long as there was de- I