The Seattle star. [volume] (Seattle, Wash.) 1899-1947, 1923-03-15

I Probably n wa shall follow a re-
disc0un,ing Transaction with the fed
cral reserve bank riEht thru from
tho merchant who needs money 10
is conclusion. the benefits OF this
Law Will bo better Understood
We viii assume that thrre IN
I rather severe raar Of uyrF-rxtrndrd
and sn-callrd frozen credit condition
% Affairs Money b. tight. the banks
arc loaned up 10 Tho limit Under
. tho old syairm It would have bsen
I practically impuEsbls for anyone 20
I borrow money from n hank at such
a time. no matter how substantial
the applicant was or how badly be
might need the loan.
Now under there conditions We
viii assume that tho Progressive
! Grocery company Of seattle. which
is sound. wcll-manaEed wholesale
house, needs 10 borrow 100000 20
I discount ita purchases and put IN a
supply OF merchandise that Ia nscea-
sary for tho orderly conduct Of It's
I business.
II applies TO its local bank. the
I Tenth National bank Of Seattle, This
banks reserve II down 10 that Il
cannot loan the money from It's own
funds However. Il accepts tho notca
from the grocery company after eI-
aiming and approving ila latest
financial statement These notes arc
made payable 90 days after date and
tho bank discounts Thorn at per
cent Interest, crcd!unE the proceeds.
iaS,5oo. to the account Of the grocery
company on lig books
Tho bank then takes these notes
with copy OF the grocery oompanys
statement TO the local branch OF tho
federal reserve bank. tho manager Of
which requires proof that the pro.
eecds Of tho notes was not used for
speculation purposes or for pcrna-
ncnt improvements OF building. etc.
Ho also must be convinced by pcrlisai
Of tho statement that tho grocery
company can pay the notes when
they mature.
After he II satisfied regarding
these requirements, be discounts the
notes for the Tenth National bank at
per cent discount placing the pro-
Ceoda 10 tho banks credit on tho
books OF the federal reserve hank.
This credit ia for SeS.75o. You will
see that the bank has made profit
OF $3.50 on tho transaction for lend
ing its credit 10 tho grocery COM
pany. This In in some ways a potion
tial source OF danger aud win be
commented upon later.
For the purposes OF our discussion
wO viii assume thnl the local federal
reserve bank Is head office. be-
cause branch which we have In Sc
attic, cannot Issue It's own currency
but can only pay out tho money OF
It's main office.
Each federal reserve bank has q
federal reserve agent who keeps all
federal reserve notes until they are
bought by the federal reserv bank.
our reserve bank now takes tho
100000 notes OF the grocery com
pnny and delivers them to the fed
cral reserve agent who gives II in
return 100000 OF the federal reserve
notes. These notes are paid out by
the federal reserve bank when this
Tenth National bank checks out the
100000 credit in tho reserve bank:
such action being necessary when the
grocery company checks out it's
money TO pay bills, etc.
We have manufactured 100000
credit and put additional currency
into circulation, which when II Is nc
longer required, should be retired.
The 90 days for which our notes
were given have expired and the gro.
Gerry company wants to pay It's note
Tho federal reserve bank must either
pay tho federal reserve agent 100000
federal reserve notes, give him the
Same amount OF other notes, or de.
post 100000 gold before 1t can get
back tho note Of tho grocery corn.
pany 30 as TO have II available for
collection.
We will now assume that there Is
not such an active demand for cur.
rcncy and tho local banks have found
; they had an excessive amount on
hand. This currency is of no value
to such banks In their vaults 80 they
have deposited their surplus In The
federal reserve bank. whore II can bC
counted ns reserve. This currency Is
therefore, delivered TO the reserve
agent and retired, tho note In paid By
the grocery company, and tho trans.
action W. closed
(Thc next lnstnllmcnt will conclud,
the scries)