New-York tribune., 1922-12-10
What Reserve Ratio Means
Represents the Proportion Which Reserve Funds OF
Regional Banks Bear TO Amount OF
Both Notes and Deposits

finding his business growing. il IN need
Of additional funds with which 20 In
crease his stock Of goods. He goes 10
his bank and obtains a loan, part OF
which he may wish 20 receive In the
form OF n deposit credit against which
he may draw checks, and part Of which
he may wish 90 receive In currency.
II his banks reserve 10 high, u may
be able 60 supply him without borrow
ing.
But IL business Is exceptionally ae-
tive the bank itself may have 10 bor-
row In order to accommodate the mer-
chant and It's other customers. II bor-
rows perhaps 100000 at the Reserve
Bank, receiving In return Federal Re
serve notes or deposit on the books
Of che Reserve Bank, which under the
law serves as reserve against the in
creased deposits Of is customers. The
Reserve Bank does not pay out or part
with any Of the cash composing its re-
serve, but the aggregate Of It's de
pOsits and notes IL increased 100000
and the reserve ratio IS proportionate-
ly lowered.
Payment Of Member Loans
Conversely. when business activity
is diminishing. the Batavia merchant
and many others like him are paying
of their loans at their banks and at
the same time currency Is being re
leased from circulation and deposited
in the banks. With these receipts the
banks in turn reduce their borrowings
at the reserve banks The cash COM
posing the reserves Of the Reserve
banks Is not increased, but their de-
posits and notes arc decreased and the
reserve ratio Is proportionatcly raised.
Thus. II conditions were such that the
gold reserve remained practically sta
tionary, the reserve percentage would
reflect directly the changing needs Of
business and agriculture. It's lower
ing would mean n growing volume OF
commercial activity. accompanied by an
increased credit demand upon the
banks and a gradual narrowing Of the
margin OF available credit It's rising,
on the other hand, would mean a slack
ening pace Of industry. an easing In
the credit demand and a replenishing
OF the credit reservoir.
Eject Of Gold Movement
But present conditions are not such
that the gold reserve OF the Federal
the last two years IL has increased
more than billion dollars. practically
al Of which represents importations OF
gold. In tho early stages Of the gold
movement. when the gold found it,
way into the Reserve banks. II paid
debts owing by the member banks:
latterly Il has permitted the member
banks 20 increase their deposits 20 the
highest point ever reached and Mt the
same time 10 maintain the reserves
that the Law requires with very little
borrowing from the Reserve banks.
The combined effect of these huge
gold imports. increasing the reserves.
and of simultaneous heavy redemptions
Of +. r. notes. decreasing tho liabil-
tiles, has been to bring about the
present reserve ratio Of about n per
cent, which compares with the ratio Of
So per cent when America entered the
war and the ratio Of f2.5 per cent in
the autumn Of 1920 when the credit
strain was at its peak.
The present high reserve ratio, then,
is in large part due to the recent flow
Of gold to the United States from coun-
tries which for the time being are not
on the free gold basis which obtained
before the war. A return 10 such q
basis, under which gold would flow
freely into or out Of such countries in
settlement OF international balances,
would. II our balances were adverse,
cause a corresponding outflow OF our
gold. This would decrease our reserve
ratio. exactly as recent imports have
increased it.