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

Very closely connected with the power of the
federal reserve banks to lend is their power to
issue currency-federal reserve notes The power
to lend taken by itself would be of far less value
If the power to issue currency did not go with
it. Just as the customer who makes loan at his
bank may need to draw out part or all of it in
currency so a member bank in making loan at a
federal reserve bank may need to draw out part
or all of it in currency. The power to issue cur
rency insures TO everyone who has a deposit in a
solvent bank the ability to draw it out in cur.
rency. That explains why this country never
again need have money panic such as that Of
1907; explains indeed, why there sug-
gestion Of a money panic in the difficult months
of 1920
Look AT a fyedollar bin 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 are also redeemed
in gold at any federal reserve bank
Each federal reserve bank is required by law
to set aside security, dollar for dollar, against
the notes it issues. The security may be either
gold, or borrowers paper very shortly to be paid,
representing either loans for the production or dis
tribution of goods and farm products or loans to
holders of the United States government securi-
ties. The gold which the law requires federal
reserve bank to maintain rs 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 check
on his bank and cashes 1t. If he has not enough
money in the bank to meet the check, he may
have to make a loan. In Just the same way, when
a member bank needs currency, it 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 so does
a member bank at the federal reserve bank. That
is how the total amount of currency in crcula-
ton decreases. As federal reserve notes for which
there is no demand accumulate in a federal reserve
bank, they are either destroyed or put away in
its vaults until some need calls them out again.
Whether the volume of federal reserve notes in
circulation increases or decreases depends not
uron the initiative of the federal reserve banks
but upon the needs of the member banks. Their
needs in turn are 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
Il
together that nationwide resources may work as
a unit in a national emergency or be modified to
meet local emergency too severe for local re-
sources to cope with. It also preserves the right
of local self-govenment 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 a federal reserve bank. In many dis.
ricts the federal reserve banks have one or more
branches for the better service Of the member
banks Each federal reserve bank has its own
stockholders, directors, officers and clerks like
other banking institutions. The stockholders are
the member banks. It's nine directors are resi-
dents of the district some from the cities and
some from the country. Three are appointed by
the federal reserve board in Washington, and the
other six are elected by the member banks, each
having one vote. In voting, the banks are divided
into three groups, each of which elects two IL
rectOrs. These groups are composed, respectively,
of the smallest banks the middle-szed banks and
the largest banks Only three of the directors can
be officers or directors of other banks. At least
three and usually a majority, are representative
of industry commerce and agriculture. For these
are the interests which, through the member
banks the system is intended particularly to
serve and protect,
These men are responsible for the management
and control of the federal reserve bank. They
elect it's officers, determine the policies under
which 1t operates and establish subject to APP
proval by the federal reserve board, the rate of
discount it charges. All profits, after setting
aside the surplus provided in the law and after
paving the member banks six per cent dividends
on their stock, 90 to the United States treasury
and are used to reduce the national debt.
The Coordnatlng body is the federal reserve
board In Washington, which is made up Of seven
members-hye who are appointed by the Pres
dent and devote their entire time to the work
together with the secretary of the treasury and
the comptroller Of the currency
The federal reserve board however, IS not IN
operating body. Except for its power to require
one federal reserve bank to lend to another
federal reserve bank, Its powers are almos
entirely supervisory But the board does not pass
upon the Individual loans which federal reserve
bank makes to a member bank. The board itself
of course, cannot lend money because it has none
to lend
In their right to borrow at federal reserve
bank all member banks, large small, are equal
The law says that federal reserve bank shall
make each member bank such loans as may be
safely and reasonably made.
The Federal Reserve system provides the
entire country with currency responsive to Its
varying needs and thus removes the danger Of a
money panic Moreover, 1t provides the entire
country with n great reservoir of credit from
which farm and range, forest and mine, factory
and store may receive assistance in producing
and marketing all the innumerable goods anl
wares which go to make up American commerce
industry and agriculture