University Missourian. [volume] (Columbia, Mo.) 1908-1916, 1913-01-12

banks and create deposits there.
A bank may have, for instance. ST.
OOO, 900 in deposits. and only 100000
in money, and still be perfectly sound
and conservatively managed. The
banks of the whole country have
fifteen billion dollars of deposits. and
only one and one-half billion dollars
OF money. They hold one dollar for
every ten deposited. They owe their
depositors five times as much money
as there is in the whole country.
Yet these deposits are as good as
money. because they are payable In
cash on demand-except in times OF
panic Adam Smith tells how. during
run" in London a century ago. the
bankers paid in sixpences to gain
time; but no such subterfuge Is pos
sible here, and the result is that our
bankers refuse to pay at all.
Our banking system has many
faults. but the two which contribute
chiefly to this condition are our costly
scattered reserve system and the lack
of a rediscount market for commercial
paper
Reserve Requirements.
| The National Bank Act requires that
the banks operating under it shall
keep a certain proportion of cash re-
serves to their liabilities-25 per cent
in the case of central reserve city
banks. 10 per cent for reserve city
banks, and per cent for country
banks. These reserves are rigid.
The paradox of the law is that, having
provided them for an emergency. they
are not available for an emergency.
They can not be drawn down under
any circumstances. Having set aside a
certain number of cots in the hospital
for use should a railroad accident Oc-
cur. the door is locked when the ac-
cident does occur-those cots are not
to be used!
So that when a crisis comes. the
banker must protect his reserves at
any cost. A merchant with perfectly
sound paper may present 1t to him
with request for accommodation, but
he can not extend the accommodation.
Country bankers, who are permitted
under the law to redeposit part of
their reserves with reserve city banks.
call frantically for funds. On every
side there is a selfish boarding of gold.
The alarm spreads as fast as electri-
city will carry it. The banks finally
are forced to suspend payment of cash
until the storm blows over or de-
creases in violence.
are pooled in common reservoir, in
stead of being scattered through some
$4,000 banks. as they are here. They
are therefore as much more effective
in relieving trouble in any quarter as
reservoir of water is more effective in
quenching a confiagration than $4,000
small pals holding the same quantity
OF water. And a panic may well be
likened to a fire. because it starts in
some one community, and will spread
across an entire country. even to other
countries, unless checked in time.
1t has been pointed out that a mer-
chant with sound paper is often un-
able to obtain accommodations during
a crisis. Thus, although he has a SOL
vent concern and is conducting his
business on proper basis. he faces
ruin. If there were an agency to re-
discount his paper, the bank to which
he applied would not hesitate to ad-
vance on it the funds he needed. be-
cause it would know that it could at
once convert the paper into further
funds by turning it over to this agency
for rediscount. If the paper were un- !
sound, then it would be refused and
the merchant might fail. A crisis
would witness the swamping of those
concerns which had been conducted
on too optimistic a basis. but not of
those cOnservatively and properly !
managed.
Essentials Of Reform.
A panic-proof banking system. then.
must provide for some agency to hold
the pooled reserves of the whole coun-
try. or agencies to hold the reserves
of limited number of districts. 1t
must provide system whereby a bank
having in its portfolio sound CONNER
cial paper may always be certain of
the ability to convert that paper in
stantly into funds. IN Europe this is
accomplished through central banks.
We can not have a central bank, and
do not want one: but We can. and
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