The Washington herald., 1921-09-05

onoer the old national banking
system in effect before the Federal
reserve act. the gold and lawfu,
money which the national bank.
neld as reserves were in the pro-
poruon on the average Of about Il
VI reserves to sS OF loans and de-
posits' This power of EXPANSION
was In part the result Of the ability
vi banks In the smaller cities and
Vlaees to keep a portion of their
reserves with the city banks, where
.ney were used as the basis for fur
'her expansion. Country hanks
were obliged to keep Is per cent of
tneir net deposits in reserve. of
which three-fifths could be kent ON
deposit In reserve or central reserve
cities. Reserve city banks were re-
quired to keep a IS per cent re-
serve, OF which half could be on de-
poslt IN central reserve cities, and
banks in central reserve cities were
required to keep a 25 per cent re-
serve. all of which was kept in their
own vaults. Thus the same dollar
OF gold or lawful money might be
used as reserve in three different
banks. permitting an expansion
greater than that implied in the av-
erage reserve requirements of the
several individual banks.
In times of financial ease. when
expansion was least needed. there
was normally a tendency for this
method of depositing and redeposit-
ing reserves to be carried to its
limit. But as soon as financial
stress was foreseen. when eXpan-
sion was most needed, there was a
tendency for the banks to draw
their reserves on deposit into their
own vaults. thereby reducing the
power of expansion inherent in the
pyramiding of reserves.
Mobilization of Reserves.
Under the Federal Reserve act.
which became effective on Novem-
Der 6, 1914, and the amendment to
1t of June 81, 1917. the unsound.
method of depositing and redeposit-
ing reserves in commercial banks
came to an end. The entire reserves
of all member banks were to be
kept at the Federal Reserve banks.
This pooling of reserves at once
made for greater safety and per-
mitted somewhat smaller reserve
requirements. Required reserves of
country banks against net demand
deposits were reduced to I per cent
of reserve city banks to 10 per
cent. and of central reserve city
banks to l3 per cent. The uniform
reserve requirement on time de-
deposits were reduced to per cent,
Whatever cash member bank
might find IL necessary to keep in
its vaults for use as till money.
amounting now to about per cent.
was not to count as reserve at all.
This was most important change
in the law, because it had the effect
of transferring to the Reserve
hanks, where it might serve when
necessary as the basis for credit
expansion, practically all of the
gold formerly held in the vaults Of
member banks.
The power of expansion implied
in these reserve requirements
should be considered in connection
with the reserve requirements
within the Federal Reserve banks
themselves. A Federal Reserve bank
is reffuired to keep a minimum of 40
per cent of gold as reserve against
Federal Reserve notes. and a mini
mum of 35 per cent of gold. or law
full money. against deposits.
Gold In the Reserve system.
Gold, as far as the member banks
are concerned, has no power of ex-
pansion until ii is on deposit with
a Federal Reserve bank. Thus a
deposit OF 100000 of gold in a
member bank merely counts as a
deposit and is not susceptible of
expansion until it is deposited in a
Federal Reserve bank. when, on the
average. it will permit an increase
Of about s1,150,0O0 in the loans and
deposits of a member bank. The
expansion would be very much
greater than that il it were not for
the fact that a large part of the
deposits created at a Federal kc-
serve bank are drawn out again in
the form OF Federal Reserve notes.
While the statements of individual
Federal Reserve banks show con-
siderable variation, the proportion
Of Federal Reserve notes outstand-
ing, as compared with the deposited
reserves of member banks, Is at
present in the ratio of about three
to two, which comedies with the av-
erage estimated by Prof. w. M.
Persons, Of Harvard. On the as
sumption, then, that 50 out OF every
IS deposited with the Federal Re-
serve bank Ia Withdrawn In notes
500, 900 Of gold deposited In the
Federal Reserve bank would permit
an average increase in the loans
and deposits of member banks as
follows:
For banks 10 central reserve eities. OSo' 'oOc c
.GsG