Evening star. [volume] (Washington, D.C.) 1854-1972, 1913-01-18

out briefly the two chief faults of our
present system, namely: That its defect
i've mechanism inevitably precipitates
panics and currency famines and that 1t
to make clear the principle of centraliz-
ing reserves.
What Is BankingP
One who deposits does not thereby have
money in bank. A deposit simply buys
the right to draw upon the bank. Money
deposited becomes. the property of the
bank. which gives in exchange it's prom
Use to pay money.
One who borrows does not usually Dor
row money. He gives his promise to pay
money at a future date In exchange for
the banks promise to pay money on de-
mand. ordinarily expressed In the form of
deposit credit subject to check. This
explains the fact. which is to be borne in
mind, that increase of loans inevitably
increases deposit liabilities
Modern commercial banking, which we
are considering, is not business of ware
housing money. nor chiefly of dealing in
money. but of dealing in prOmises-tO-
pay-money.
In modern commerce the use Of actual
money Is limited to such transactions as
the smaller retail purchases. payments
incident to movement Of crops, payments
OF wages and the settlement of balances
between banks. Settlements with money
constitute less than 10 per cent of the
total, more than 80 per cent being made
with promises-to-pay-m money. Bank de-
pOsttS are prOmiseS-tO-pay-mone These
are circulated for making settlements by
means Of checks.
These neutrality-suspicious. are based
upon actual money held In bank reserves.
The aggregate money in bank reserves
in this country is approximately equal in
amount to that in circulation. It is thus
seen that money in bank reserves per-
forms more than ten times the service
Of an equal amount in circulation. Large
commerce Is possible only through this
use Of money in bank reserves as basis
for NEUTRALITY-SUSPICIOUS. Stable COM
merce Is possible only when the banking
are SO protected that they serve COM
merce by uninterrupted performance of
their function as basis for credit prom
iseS-to-pay-mOney.
Chief Source Of a Banks Profit.
A banks chief source Of profit, and
that which makes its existence possible.
lies in lending portion Of the funds de-
posted 1t contracts to repay depositors
in money on demand. The constant
hazard is that its supply of money may
be insufficient to make good this con-
tract. This influences against lending.
The desire for profit influences for lend
ing.
Ofsetting deposit liabilities and provid-
ing means to pay them, a bank has, first,
money to such proportion Of liabilities as
1t deems adequate to meet depOsitOrS' de-
mands. This is its reserve.
Second shOrt-time loans, which. as paid
from day to day. provide means for replen-
fishing reserve. Reduction of loans Is a
banks only means Of increasing its re-
serve. For clear understanding. 1t Is i'm
portant to see the vital relation between
reserves and loans. If bank reserve
Is excessive it may Increase loans; If de-
ficient it must reduce loans. A bank
may not make a loan, no matter how we'll
secured, II its reserve Is deficient; 1t
must reduce loans. bank may not
make q loan, no matter how well secured,
If its reserve Is deficient.
The Cause Of Panics.
In period Of active business the de-
mand for loans is naturally heavy, SO
that the total Of loans increases and also
the total of deposits which result from
crediting the proceeds of loans subject to
borrowers checks. But since the volume
Of actual money remains fairly constant,
bank reserves do not quickly increase
proportionately with an increase of loans
and resulting deposit liabilities. There
fore as the total of loans increases. the
ratio of reserves to deposits declines
To illustrate this, from september. 1911,
to September, 1912. loans Of national
banks increased 1911, OOO,OOO. liabilities to
individual depositOrs increased $4O1 0O0,-
OOO. while reserves increased less than
$500, 600.
Business usually expands upon the
promise Of good crops. The mere antici-
patton Of good crops thus increases loans
and deposit liabilities resulting from
them. lowering the ratio Of reserve to de-
posts. The necessary payments in money
in connection with the actual harvesting
and marketing of the anticipated crops
causes an increased flow of money out
Of bank reserves into circulation. steadily
reducing still further the ratio of re-
serves to deposits.
In such a situation banks can see no
important relief from the steady drain
upon their reserves until the crop move
ment may have proceeded to the point
where the requirements for money to
circulate diminish and the return flow
begins Of money out Of circulation into
bank reserves. This point may be some
weeks or months ahead and will be cor
respOndingly deferred by any delay in the
prompt marketing Of the crops. such as
drain upon reserves becomes such that
banks become apprehensive lest their
deficient reserve may not tide them
over, they must shape a course to avoid
failure. that is. failure to fulfill the con-
tract with depositors to pay their de-
mands in money. The first step is re-
fusal Of new loans to solvent borrowers
These may be in urgent need and in
ability to negotiate loans may cause en-
barrassment. Then follows an effort to
induce borrowers to pay part or all Of
maturing loans in order to increase re-
serves. They endeavor also to sell loans
to correspondent banks in financial GEN.
tiers. or to borrow. If. however. banks
in centers also have deficient reserves,
both because Of drains from crop moving
demands and from repayment of bal
m infariar hon Mt
render assistance. II borrowers cannot
pay maturing loans and IL there is no
other way of converting loan assets into
reserve money, banks are helpless.
When such a situation of credit strain
Is general, embarrassments of borrowers
L RAPIDLY multiply. and when soma con-