584 IOWA DEPARTMENT OF AGRICULTURE 



had noted the increased sluggishness of the credit engine and was ready 

 for the descent. The landing has been safely made. 



What Has Happened to Credit? 



But what is wrong with the credit engine? And why is it that the 

 farmers and meat producers in the middle west suddenly find themselves 

 so restricted in their borrowing? And why is it that the banks cannot 

 now furnish all of the funds which are now so much needed? Let us 

 look over the credit engine called the bank. First of all let us be clear 

 in the thought that a bank does not manufacture credit, or money to loan, 

 out of thin air, any more than you can make gasoline out of water. A 

 bank in any community is simply the central exchange place for the 

 accumulated savings of the capital of the community in which it does 

 business, as the telephone exchange is the central place thru which we 

 are able to carry on conversation with our neighbors. Some of these 

 deposits represent small savings, payable at a definite time, and with 

 a fixed rate of interest thereon, usually from four to five per cent, and 

 the obligation of the bank to pay these savings is represented either by 

 a savings pass book or by time certificate of deposit. Other deposits 

 represent occasional or seasonal accumulations of money on the part of 

 business men and farmers, which deposits are payable on demand and 

 are usually withdrawn by a check on the bank. The only other liability 

 which a bank ordinarily has is for the amount of money paid in by the 

 stockholders for the capital of the business. 



Now, the money put into the bank by the depositors and the small 

 portion of money put in by the stockholders is available for loaning out 

 to borrowers in the community, with the exception that a certain part of 

 the resources, usually 10 per cent, is required to be available in actual 

 cash. This percentage is called reserve and is required by law to be 

 maintained intact. Then the money as loaned out to farmers and others 

 is represented in the assets of the bank by promissory notes, mortgage 

 notes and some bonds. 



Everything goes along lovely with these banks just as long as Tom, 

 Dick and Harry leave a certain amount of deposits in the bank, and as 

 long as Peter and Paul pay back the $2,000 they have borrowed, thus 

 making the $2,000 available to be loaned to John and Henry. Any one 

 can run a bank under those conditions, assuming, of course, that he 

 used reasonable care and discretion in loaning the money to responsible 

 people. And as long as the money in the bank is loaned to people who 

 repay promptly, and within a period of a few months, and is loaned for 

 the purpose of enabling them to handle merchandise, corn, oats, cattle 

 and hogs, which are going to market steadily and finding a ready sale, 

 then a bank's assets are said to be liquid and readily available. Under 

 these conditions if some of the bank's customers should start to with- 

 draw their deposits the banker would simply recoup his loss of funds by 

 calling in some of the loans made, as they became due, and by not mak- 

 ing any new loans. 



In normal periods, the banks in the middle west will during the 

 summer accumulate more money than is called for by the people of the 

 community, and if they are wise they will carry this in the form of 



