America's Money Machine

Advent of Storm 85
The full statement, which sets forth some of the more modest gains in
banking and currency practice, is as follows:
Among the principal direct benefits which the new act confers are these:
First, it supplies a circulating medium absolutely safe, which will command
its face value in all parts of the country, and which is sufficiently elastic to
meet readily the periodical demands for additional currency, incident to the
movement of the crops, also responding promptly to increased industrial or
commercial activity, while retiring from use automatically when the legitimate
demands for it have ceased. U,nder the operation of this law such
financial and commercial crises, or "panics," as this country experienced in
1873, in 1893, and again in 1907, with their attendant misfortunes and
prostrations, seem to be mathematically impossible.
Second, it provides effectually and scientifically for the mobilization ofbank
reserves in the 12 Federal reserve districts, where these funds are not only
available for the member banks of each respective district, but, under wise
and well-guarded provisions of the law, the surplus moneys of anyone
district become available for the legitimate needs ofany other districts which
may require them.
Third, it eliminates the indirect tax of many millions of dollars annually
upon the commerce and industry of the country, heretofore imposed in the
shape of collection or "exchange" charges on checks, and inaugurates a
system ofclearances by which it is expected that every check or draft on any
member bank in anyone of the 12 Federal reserve districts can be collected
ultimately free of the exchange charges heretofore exacted and may be
charged on the books ofthe Federal Reserve bank to the account ofthe bank
upon which drawn, in most cases, within 24 hours or less after it is deposited
with a member bank. This provision renders available many hundreds of
millions ofdollars heretofore carried in transit in the mails in expensive and
tedious processes of collection, sometimes absolutely useless during weeks
when much needed, held in transit moving from point to point.
Fourth, it furnishes a discount system by which every well-managed member
bank may have the opportunity ofconverting into money by rediscounting,
to such extent as may be necessary or desirable, all commercial paper
having not more than three months to run which it may have taken in the
ordinary course of its business. The new law removes, so far as borrowing
money from a Federal Reserve bank is concerned, the limitation which prevented
a national bank from borrowing an amount in excess of 100 per cent
of its capital. The significance of this release may be appreciated when it is
realized that some national banks have deposits amounting to 10 times their
capital or more. The ability to borrow only an amount equal to capital would
be wholly insufficient, in many cases, to enable banks to meet the demands
which arise from unexpected runs, or in financial crises, or other extraordinary
demands.