, 1922-10-26

AN These federal reserve III uo
going up all over the country-a
fact which shows the magnitude and Importance
of the system. In response to n public demand TOT
information about the Federal Reserve Banking
system and its operations the following oflciai
statement is presented:
A federal reserve bank does for banks almost
exactly what banks do for their customers. IL
receives money on deposit from such banks as
have become members of the Federal Reserve
system. and lends to them. All national banks
IRE members of the Federal Reserve system, and
many state banks and trust companies have
become members also. Every member bank is
obliged by law TO keep with its federal reserve
bank al amount of money which bears "A certain
proportion to the deposits it has received from
its customers. This is called a reserve and as
the federal reserve banks keep the reserves of
their members they are called reserve. banks.
AT times, member banks borrow from their federal
reserve bank just as individuals borrow from their
own bank. individuals cannot der0slt money
with q federal reserve bank, or borrow from 1t;
their relation with 1t is through the member
banks.
Before the Federal Reserve system was In oper-
alton. each individual bank stood virtually alone.
This was safe enough as long as things went well
In tho business world, but even then the machinery
of banking was so cumbersome that 1t often
worked badly.
In order to meet the requirements of law and
to pay depositors, all banks used to keep large
mounts of gold and currency on hand and most
of them also kept money on deposit with other
banks in the larger cities. When all went well,
the money on deposit with the city banks could
be Withdrawn in currency whenever 1t was
wanted. But when, as sometimes happened, busl-
ness or banking conditions were disturbed and
suspicion was in the air, the banks were anxious
to increase the amount of cash on hand lest an
unusual number of deposltors might want to with
draw their money. And 1t was at those times that
the city banks were least able to furnish cash.
For the available supply of currency was limited,
and there was no quick way of increasing 1t.
The limited supply of currency led to the panic
of 1907. For, moved by apprehension, almost every
one of the twenty-four thousand banks sought. for
its own protection, to withdraw such currency as
It could from other banks and pay out as little as
possible TO its deposltors. Though emergency
measures were finally taken, they were too late
to prevent the coming of trouble, and the existing
banking machinery fell apart into thousands of
separate units.
Each bank had to trust largely to its own cash
resources, because, however willing. the other
banks felt they could not give up much Of their
cash, for by doing so they might Impair their abil-
INV to meet the possible needs Of their own Gus
toners. Each bank. in seeking 20 protect itself,
necessarily weakened the entire banking struc-
ture. The defenses were weakest when the
danger was greatest.
The result was that every few years a money
nnnlc occurred. bringing disaster and depression.
These money panics from which the United States
suffered. and which the organization of the Fed
ernl Reserve system now prevents. We're, of course.
quite different from the commercia! crises from
which every country occasionally suffers.
Under the Federal Reserve system there is a
oulck. certain, automatic way by which the banks
lint are members of the system help one another.
In good times and bad. This Is important to every
business man, every farmer. every working man,
every citizen. II is the result of organlzation-the
Kind Of organization that makes u system Of
reservoirs in IA community better than many sep
nrnte wells.
II is appropriate TO think OF the Federal Reserve
system MS exactly thnt-a system of reservoirs.
There are twelve OF these reservoirs, the federal
reserve banks Of Boston, New York. Philadelphia.
Cleveland. Richmond. Atlanta. Chicago. st. Louis.
Alnncnpolis, Kansas City, Dallas and San Fran
cIsco-each serving the needs Of the member
banks In it's own federal reserve district. In each
of these reservoirs credit is stored up. and from 1t.
ms the need arises, credit Is supplied to the MEM
nor hanks md through them to their customers,
including not only business men and farmers, but
other hunks Ms well. The process Is much like the
storing NJ Of water In n city reservoir, from which
II is supplied to houses and their occupants.
II may be thought strange that such II thing us
credit. which In this sense Is the power to make
loans. can be stored up. But the fact Is, a great
deal of IL is stored up In the federal reserve reser-
volrs. For. ms we have seen. the member banks
deposit in the Federal Reserve banks most OF the
gold they formerly kept In their own vaults and
SOME of the money they used to keep on deposit
with other banks. And II Is the gold which fed.
crnl reserve banks require in this and other why's
that gives them the ability to make loans and
issue currency.
The provisions Of the law are such that the
federal reserve banks can make loans to an
aInount between two and three times ns much as
ihe gold they have. SO. having a supply OF gold