The Manitowoc pilot. [volume] (Manitowoc, Wis.) 1859-1932, 1922-10-26


the reservoirs fails In 1920 the reservoirs ran
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 q reservoir becomes
useful when 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 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:
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 he asks his local
Austin bank for loan This is the first step just
referred to-
The Austin bank, satisfied with the grocer's
credit makes him 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 rays off his note.
In ordinary times and in slack seasons, 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 time when
many people are asking for loans to carry their
or another are having to draw down their
deposits If the Austin bank is to continue to lend
money and pay its depositors, it in turn will have
to borrow
Before the Federal Reserve system was in oper-
alton, the Austin bank would have had to ask for
u 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 It's own resources were running below what
it might need to meet all the demands of its GUS
toners.
Now however, as a member of the Federal
Reserve system, the Austin bank is in a quite
different position. 1t has bank of its own. the
Federal Reserve bank of Dallas, to which it goes
as a natter 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 dollar.
The Dallas Federal Reserve bank examines the
notes to 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 ana the rate or interest tle Ieuefal reserve
bank charges is called the Discount rate" This
is published rate, applying uniformly to all mem
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
It's 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
federal reserve bank sends 1t 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
been able to carry on his business,
The simple transaction of the Austin grocer is
typical of the vast mass of loans which enter into
the operations of the Federal Reserve system.
Suppose for instance, that instead of the grocer,
the borrower is dry goods merchant in Butte
hardware dealer in Chicago a steel maker in
Birmingham, a lumberman in Seattle an
exporter in New York-each responsible bust
ness man in good financial standing locally
Suppose again, that the borrower Is anyone
who owns United States government bond or
note and puts It up at his bank as security for
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, redjscounted 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 its federal reserve
hank sometimes cause federal reserve bank
10 borrow Borrowings by many member banks,
representing loans that they have already made
IA their customers, sometimes draw down the
reservoir 10 such point that 1t must be replen-
isbed If the federal reserve bank Is to continue
to lend
This country is so vast thai one section Of it
,s ant to have credit to spare when another sec
zion needs credit All that Is necessary is a quick
and easy means for bringing them together. The
I,,derol Reserve system furnishes the means and
hoe often used It, A federal reserve bank renews
ITO rover TO lend by borrowing from another fed
oral reserve bank in district whore the demand
for credit is smaller. 1t puts up as security the
notes upon which it has lent to its member banks
In other words, one of the twelve reservoirs in
fine countrywide system pipes in some of the sur
Mus credit from one more of the other
yors and so renews Its power to lend
1-his is the kind of beneficial cooperation be-
t,yeen agricultural ana Industrial districts that
actually took place in the difficult years of 1920
ana 1921 AT times when agricultural districts
such as Richmond, Atlanta, St Louis, Mime
onois Kansas City or Dallas, having received
large amounts Of money in payment for their
,rona had surplus credit they lent It to indus
trial districts which were in need of II. At other
times when the situation changed and industrial
districts such as Cleveland Boston, New York or
philadelphia, having received payment for goods