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a member bank sends money to the Federal reserve bank or vice versa the charges are borne by the Federal reserve bank. If checks received are on banks in other Federal reserve districts they are sorted by the reserve banks and forwarded to them for collection, the account of the Federal reserve bank being charged.

To save time banks in New York City which receive numerous items from banks in other Federal reserve districts, sort these items and send them direct to the proper Federal reserve bank. At the same time they give the Federal Reserve Bank of New York a memorandum of the list so as to obtain credit according to schedule.

77. The gold settlement fund. Each member bank has an account with the Federal reserve bank and its checks are cleared by entries on those accounts. To clear the debits and credits of each Federal reserve bank with the other eleven reserve banks a gold settlement fund is maintained by The Federal Reserve Board in coöperation with the U. S. Treasury in Washington. Each Federal reserve bank maintains a balance of many millions of dollars in this fund. Each morning before 10 o'clock eastern time each reserve bank telegraphs the Board the amount it credited to each other bank the day previous. The Board from the telegrams clears the debits and credits by book entries and before 11 o'clock wires each bank what its debit is to other banks, and its net debit or net credit for the day to its gold settlement account.

During a year billions of dollars of clearing are effected by book transfers of much smaller amounts and the transportation of even these relatively small amounts is eliminated.

78. Exchange between cities of the U. S.-The cost of transferring funds from city to city for member banks is now absorbed by the Federal reserve banks, and only the cost of telegrams and shipping charges is made against

non-member banks. Formerly to get money to and from New York or elsewhere the banks actually shipped it. Express charges were heavy. To avoid these charges a bank in St. Louis which wanted to send money to New York would first try to find a St. Louis bank which had a surplus balance in a New York bank. Then it would buy that bank's draft on the New York bank. If a bank in Washington wanted gold from a city where there was a sub-treasury it could get it from the Treasury by presenting a telegram showing that the sending bank had deposited it in the sub-treasury.

Now if a bank in Lawrence, Kansas, wants to transfer $10,000 to the Chase National Bank in New York, it simply wires the Federal Reserve Bank of Kansas City to transfer that amount to the Federal Reserve Bank of New York for the credit of the Chase National, which it so notifies. The Kansas City reserve bank debits the Lawrence bank and credits the New York reserve bank. The New York reserve bank debits the Kansas City reserve bank and credits the Chase National. If the Lawrence bank wants to get $10,000 from the Chase National Bank it wires them to deposit with the Federal Reserve Bank of New York that amount for the credit of the Reserve Bank of Kansas City. It wires the Reserve Bank of Kansas City that it has done this. The Reserve Bank of Kansas City credits the member bank and debits the Reserve Bank of New York immediately. The Chase National Bank requests the Federal Reserve Bank of New York to debit it and credit the Kansas City Bank. If when the Kansas City bank gets its confirmation it finds the Chase National Bank waited one or more days, it charges the member bank interest for each day the transfer was delayed.

7. Why member banks do not collect all checks through the Federal reserve banks. If a bank gets a check that

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it wants immediate return on, or information about, it saves time by sending the item direct to a bank in the same town or to the drawee bank. A bank may get a check for collection on which it wishes to obligate itself in no way at all. It will send it direct to the drawee bank with instructions to "pay on signature only."

A bank may use checks for collection to build up balances in other cities for the benefit of its customers. Customers of southern banks do a great deal of business in New Orleans-they need funds there to buy through cotton brokers. It is a big convenience for a bank with such customers to carry a balance with a New Orleans bank. Since the bank has an account there, it likes to help offset its drafts by sending for deposit items which it receives on New Orleans banks and other banks in that vicinity.

A member bank makes use of correspondent banks to collect checks which come to it from banks which do not affiliate with the Federal reserve banks in their plan of collecting checks (see 75).

There is another reason why the former methods persist. Independent channels of collection were built up before the Federal reserve system started. Banks performed services for each other. These pleasant, convenient, and perhaps mutually profitable relationships have just continued.

80. Nature and importance of credit. A credit exists whenever one party, in return for value received now, promises to pay value at a future time to another party. The value given, or promised, may consist of money, goods, services, or credit. The promise may be expressed or implied. It may be oral or written. It may be a book credit or a negotiable instrument. Credit plays an enormous rôle in modern business and is advantageous chiefly because it gives fluidity to property of all kinds, to labor, ability, and integrity. Future probabilities are drawn on to redeem the past, to do the tasks of today, and help create the funds out of which the debt is paid when it matures. The funds of a business are secured in the first place by (1) the sale of stock, or interest, to those directly interested in its management; by (2) the sale of stock, or interest, to others who have surplus funds to invest, and who have confidence in the enterprise and judgment of the managers; and (3) afterward by the sale of goods for the manufacture and sale of which it was organized. These funds may be increased by (4) the sale of promises to pay, either its own or others, in the shape of bonds, notes, drafts, and bills of exchange, unsecured, or secured by collateral, or mortgages on the property; and (5) by grants of credit by those from whom purchases are made. The buying of any solvent concern is not limited to its cash in hand. Every investment of its funds in real estate, buildings, bonds and stocks, equipment, raw materials, unfinished and finished products, and ac

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counts and notes receivable (credit granted to others), is to the extent that they are believed to be salable, additional buying power, or credit. The purchases by means of this credit are again the basis of additional credit and so on. Goods to the amount of $500,000 can be bought with $100,000, provided the goods are readily salable, for one then has $500,000 worth of goods with which when sold to pay back the loan of $400,000 which he has enjoyed. Similarly, $10,000 might purchase $100,000 worth of securities, if the securities are pledged to the repayment of the loan of $90,000. Likewise money combined with credit can be used to buy land. Credit may thus be more valuable to a business than its original capital. How valuable depends on the property upon which it is based. A concern dealing in cotton, or wheat, has more credit in proportion to capital at its command than one dealing in real estate, or perishables.

Banks are the most important sources of credit. A bank makes its chief profits by lending funds to people who have good credit.

81. Sound borrowing is not the asking of a favor.Borrowing and lending is as much a business as buying and selling. Normal borrowing has in view the mutual profit of the lender and borrower, just as a normal sale results in gain to both the buyer and the seller. The lender seeks an income and the borrower expects to earn upon the loan more than enough to pay the interest which he promises to the lender. Some wise lenders seek out good borrowers. Sound borrowing is not the request of a kindness; it is a business proposition. Sometimes it is the purchase and sale of money. Most often it is a purchase and sale of credit. The borrower usually exchanges a negotiable credit instrument for the use of the credit of the lender. If the credit instrument is of high quality, the borrower need not hesitate to offer it; it is the very thing