The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1933-04-08
U. S. CONTROL
OVER RESERVE
BANKS LIMITED
Common Theory of Federal
Ownership Is Erro-
ne0uS.


twelve reserve banks is an indie
pendent organization, united only
by the influence and partial control
OF a federal board in Washington
The idea Of the federal reserve
banks is simple. A federal reserve
bank does for its member banks
almost exactly what an ordinary
bank does for its customers.
John Smith, thrifty citizen, hav-
ing saved up a little more cash
than he needs at the moment, goes
to his bank and deposits it.
1t isn't much, but the surplus cash
of thousands of Smiths, pooled to-
gether in bank deposits, give the
bank great sums to lend out to re-
sponsible men who want the money
to serve business needs.
Pools Surplus Cash
A federal reserve bank does the
same thing for its members. 1t re-
ceiVes and pools the surplus cash
funds Of its member banks, collect
ing these into reservoirs of cash
and credit.
Each member must keep there
from 7 to ID per cent of it's deposits.
These reservoirs then may be
tapped by loans, by member banks
when they have need, Just as John
Smith may withdraw deposits or
get a loan from his bank.
All national banks had to become
members, and any state banks above
a certain capitalization could Join
If they met certain requirements.
Such banks in each district
formed their federal reserve bank,
each bank subscribing to stock equal
to from 3 to 6 per cent of their
own capital stock. Thus the mem
Der banks own the reserve banks.
Pay Franchise Tax
But they do not entirely control
them, nor do they get all the prof
its from them. They may re-
ceive per cent on the federal re-
serve stock they hold. Profits above
that are added to the reserve banks
surplus until that surplus equals its
capital.
After that, tenth of such profits
are added to surplus and the re-
naming profit goes into Uncle Sans
treasury as a franchise tax. Uncle
made $4,000, 900 that way last year
Since the member banks own
their federal reserve bank, they elect
its directors; that is, they elect six
out of the nine, the other three
being appointed by the federal re-
serve board in Washington.
That is where Uncle Sam and the
federal" part come in The
twelve widely separated banks are
co-ordinated by an eight-member
federal reserve board in Washing
ton.
President Names Board
The secretary of the treasury is
always chairman and the comp
troller of the currency is a member
The president appoints the other
six by and with the advice and
consent of the senate"
1t is this board and its influence
on the reserve banks that makes
"the federal reserve system"
The board makes no loans itself;
it has no money. It's principal con-
troll is because it must approve the
"rediscount rates" established by
the reserve banks.
"Rediscount" is not as myterious
as it sounds. Let's say John Smith
is a grocer. He wants to buy 100
barrels of flour. lie hasn't the
money But he is known to his
bank as an honest merchant who
pays his debts.
His bank is glad to lend him the
money, taking his short time note.
Pledges Notes for Loans
But let's say the bank just at that
time is having a lot of other re-
quests for loans; so many that it
hasn't itself the cash to grant them
all. The bank, too, must borrow.
Being a federal reserve member.
it takes Smiths note and others on
which 1t has already loaned money,
to its federal reserve bank, and
pledges them for a loan. If the
reserve bank. on examining the
notes, decides they meet the re-
quirementS of the law, it makes the
loan.
That Is a "rdiscount." and the
rate the reserve bank charges for
that loan is the "rediScount rate,
uniform in each district, and ap-
proved in Washington.
Issue New Currency
But "rediScounting. or loaning
to members, is not all that goes on
in federal reserve bank. You will
find them issuing to member banks
new currency when the business
situation demands, as during the
recent crisis, against reserves and
legally specified collateral.
You will find them retiring this
currency, sorting, counting, destroy
ing, or replacing it when it comes
back to them from member banks,
thus regulating the supply of cur
rency.
You will find them acting for the
government in selling and buying
in again its bond issues and other
securities. The great World war
loans were fioated through the re-
serve banks.
Influence Interest Rates
You will find whole floors de-
voted to fast clearance of inter-city
checks for members.
You will find them buying up
government bonds, bankers accept
ances and bills in the open market.
not for speculation, but deliberate
Iy to affect the supply of available
credit.