The Holly chieftain., 1922-10-26

the reservoirs falls In 1920 the reservoirs
very low, because the farmers and business men
made unusually heavy demands upon them at
time when they had already been drawn down by
the war needs of the government.
The supply of water in a reservoir becomes
useful when 1t 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 it is the
individual and not the reservoir that draws the
water, so 1t 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 1t so 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 ninety-day loan on his note.
The grocer buys the -four and proceeds to sell
1t barrel by barrel to his customers. AS his Gus
toners pay their bills, the grocer accumuates
money with which he lays off his note
In ordinary times and in slack seasons. a banks
own resources sufficient for Its customers
needs. But perhaps the Austin bank, which is
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
business Or perhaps Its depositors for one reason
or another are having to draw down their
deposits. If the Austin bank is continue to lend
money and pay its depositors 1t in turn will have
to borrow.
Before the Federal Reserve system was in oper-
alton. the Austin bank would have had to ask for
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 Its own resources running below what
1t might need to meet all the demands of it's Gus
toners.
Now. however, a member of the Federal
Reserve system, the Austin bank Is in quite
different position. 1t has bank of its own the
Federal Reserve bank of Dallas, to which it goes
as matter of right given 1t by law 1t sends to
the Federal Reserve bank OF Dallas the grocers
note and other notes upon which it has already
made loans. With these as security, the Austin
bank asks the federal bank for 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 see whether they are sound and accept.
able and of the kind the law permits it to lend
upon. Being satisfied, 1t makes the loan to the
Austin member bank This is called "rediscount-
ing; and the rate of interest the federal 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 n member bank charges
It's 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 it 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 a dry goods merchant in Butte
hardware dealer in Chicago, a steel maker in
Birmingham lumberman in Seattle, or an
exporter in New York-each responsible busi-
ness man in good financial standing locally.
Suppose again, that the borrower Is anyone
who owns a United States government bond or
nots and puts it up at his bank as security for a
loan. Such borrowings from member banks
whether large small, can be borrowed upon by
the member banks at their federal reserve banks
If they are within ninety days of falling due. 1t
was loans of this sort rediscounted 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 prompted the Austin
member bank to borrow from Its federal reserve
bank, sometimes cause a 1ederal 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 point that 1t must be replen-
lshed If the federal bank is to continue
to lend.
This country is vast that section of it
Is apt to have credit to spare when another sec
ton needs credit. All that Is necessary Is quick
and easy means 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 as security the
notes upon which it has lent to It's member banks
In other words, 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 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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