The Dolores star., 1922-11-03

IN a
also. As this lending power is used. the level In
the reservoirs falls 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 needs of the government.
The supply of water in a reservoir becomes
useful when ii is distributed through the water
mains. The supply OF credit in federal reserve
reservoir becomes useful when 1t is distributed
through the member banks But just as II Is the
individual and not the reservoir that draws the
water il Is the business man the farmer
who takes the first step which may result in
drawing upon the reservoir OF credit.
For example,:
grocer in Austin Texas, wishe5 TO buy fifty
barrels Of flour. He has no; enough money in the
bank with which to pay for 1t he asks his local
Austin bank for loan This is the first step just
referred to.
The Austin bank satisfied with the grocers
credit. makes him a ninety-day loan his note.
The grocer buys the flour. and proceeds to sell
1t barrel by barrel 70 his customers. As his
toners pay their bills the grocer accumulates
money with which he pays 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
member of the Federal Reserve system Is asked
10 make the loan to the grocer at time when
many people are asking for loans to carry on their
business. Or perhaps its depositors for reason
or another having to draw down their
deposits. II the Austin bank is to continue to lend
money and pay its deposltors. IL in turn will have
to borrow
Before the Federal Reserve system was in oper-
alton. the Austin bank would have had to ask for
a loan from some larger bank with which 1t 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
1t might need to meet all the demands OF its Gus
toners
Now. however. as member of the Federal
Reserve system, the Austin bank is in a quite
different position. 1t has n bank of its own the
Federal Reserve bank of Dallas. to which It goes
as a matter of right given 1t by law 1t sends to
the Federal Reserve bunk of Dallas the crocer,s
note and other notes upon which it has already
made loans. With these 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 1t to lend
upon Being satisfied 1t makes the loan to the
Austin member bank. This is called "redlscount-
ing; and the rate of interest the federal reserve
bank charges is called the Discount rate" This
Is published rate, applying uniformly to all men,
Der banks in Its district and is often quite differ
ent from the rate the member bank charges Its
own customers. The rate member bank charges
Its customers Is determined, subject to state law,
largely by local business conditions and local
banking custom.
Later, when the grocers 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
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been able to carry 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 goody merchant in Butte a
hardware dealer in Chicago steel maker in
Birmingham, lumberman in Seattle or an
exporter in New York-each a responsible busi-
ness man in good financial standing locally.
Suppose, again, that the borrower Is anyone
who owns United States government bond or
note, and puts 1t up at his bank as security for
loan. Such borrowings from member banks
whether large small can be borrowed upon by
the member banks at their federal reserve banks
IL they are within ninety days of falling due II
loans of this sort, rediscounted 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
bank, sometimes cause a federal reserve bank
to borrow. Borrowings by many member banks
representing loans that they have already made
to their customers sometimes draw down the
reservoir to such a point that 1t must be replen-
lshed If the federal reserve bank is to continue
to lend.
This country Is vast that one section of II
is apt to have credit to spare when another sec
tion needs credit All that Is necessary is quick
and easy for bringing them together. The
Federal Reserve system furnishes the means and
has often used it. federal reserve bank renews
its Lower to lend by borrowing from another fed
eral reserve bank in district where the demand
for credit is smaller 1t puts up security the
notes upon which 1t has lent to its member banks
In other words, one of the twelve reservoirs In
the countrywide system pipes in some of the sur
plus credit from one more of the other reser-
voirs and so renews Its power to lend.
This is the kind of beneficial cooperation be-
tween agricultural and Industrial districts that
actually took place in the difficult years of 1920
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