Evening star., 1932-03-13

contracted to make payment. The
leather is delivered and placed in a
warehouse. He holds the warehouse
receipts. He goes to his bank, Q mem
Der OF the Federal Reserve System, and
explains that he desires to borrow
$4,000. He is a man Of sound char
acter and good credit standing The
bank lends him the money on the Sc
curity Of the leather. He gives his
note, to which Is attached, actually, the
warehouse receipts covering the leather.
Meantime dozen. hundred, per-
hapS thousand, other manufacturers
nearby have found themselves in the
same business position. They go
through the same process, borrowing
from their banks, giving notes secured
by warehouse receipts, bills Of ladtng or
other tangible evidences of ownership
of commodity. 1t may be wool, cot
ton, pig iron or a number Of other
wares. The bank finds that it has
advanced SO much money that 1t is
not in a position to lend more,
although the borrowers are deserving
So 1t packs up the notes of the shoe
manufacturer and those of many
others and takes them to the Federal
Reserve Bank Of Boston, that being
the district in which the New England
town is situated. The Federal Reserve
Bank examines them, may possibly re-
ject few as not being regarded as
sufficiently sound, but agrees to accept
most.
Notes Issued and Retired.
Going back to the single shoe manu-
facturer. against his note, among the
others, the Reserve Bank hands out an
equivalent value in Federal Reserve
notes, new money, which never has
been in existence before. called forth
now by. the needs Of active business.
This puts the member bank in funds
to make more loans. For this the
Reserve Bank charges the member
bank rate which is uniform to all
borrowers at the same time. Rates
now prevailing range nom 3 to 4 per
cent.
Now, the shoe manufacturer. in a
couple Of weeks, finds he needs some
OF that stored leather to make up into
from which he borrowed in the first
place and pays of $4,000 OF his
$40 1000 loan. The member bank goes
to the Federal Reserve Bank and re-
tires an equal amount that 1t has bor-
rowed. That amount of Federal Re-
serve notes automatically retires from
circulation. The warehouse receipts
are released, first by the Reserve Bank,
then by the member bank and finally
W SHOE man, VINO gets
his leather. A few weeks later he re-
leases the other half The other manu-
facturers are going through the same
process with their loans and COM
modities
All the time. it will be noted, that
the Federal Reserve notes have been
outstanding they have been secured by
that leather, cotton, wool, iron, grain,
or whatever else has been borrowed
upon. In addition, each dollar has
been secured by not less than 40 per
cent gold reserve.
Here is a combination of gold re-
serve, valuable because the whole
world has agreed to call it valuable,
and a reserve composed Of things
which can be consumed and actually
are of greater value to mankind. This
makes the soundest currency In the
world. The public, using Federal Re-
serve notes in their daily affairs, are
handing back and forth convenient
pieces of paper which really represent
gold and, in addition, worthwhile
goods. Every Federal Reserve note a
man has in his pocket is his lien on q
bale Of cotton, bag of wool, or some
thing else valuable.