'KH
OCTOBER, 1913
banks are required to hold 12 per
cent of their deposits in lawful money
and 12 per cent in balances with
other banks in central reserve cities;
central reserve city banks are re
quired to hold 25 per cent of their
deposits (Including those of other
banks with them) in lawful money in
their own vaults.
The aim . of this measure is 'to
transfer these reserves away from
banks other than those to which they
belong, so that ultimately bank re
serves will be held partly in the
vaultB of the banks to which they
belong, and partly in the regional re
serve banks, the reserve banks tak
ing the place of existing reserve city
and central reserve city banks in
their relation to member banks.
PROPOSED RESERVE REQUIRE
MENTS Carrying out this plan, it is pro
vided (a) that 5 per cent of the out
standing deposits of all banks shall
be carried in the new reserve banks;
(b) 5 per cent of the deposits of
present country banks to be carried
in cash in their own vaults; (c) 2
per cent of the deposits of present
country banks to be carried either in
cash in their own vaults or as a bal
ance with new reserve banks; (d) 9
per cent of the deposits of present
reserve city and central reserve city
banks to be carried in cash in their
own vaults; (e) 4 per cent of the de
posits of present reserve city and
central reserve city banks to be car
ried either in cash in their own
vaults or as balances with the new
reserve banks.
It may be here explained that the
"balances" spoken of can be obtained
by redlscounting paper with the new
reserve banks.
THE DEMONSTRATION
From the foregoing it is clear
The Commoner
21
that as some discretion is left to the
banks about their reserves the exact
position of those reserves at any
given time can not bo predicted.
Maximum and minimum limits can,
however, be fixed. This is done as
follows:
At the date of June 4, 1913 (comp
troller's last report), the present
bank reserve in central resorvo cities
was $409,001.42-1 hell in cash.
At the same date, the reserve
which would have been required
under this bill would have been 9
per cent of net deposits then subject
to reserve requirements in cash, and
9 per cent in balances with the now
reserve banks, aB follows:
To be held In cash $141, 127,835
To bo held uh balances 111,127,835
Total .?282,255,C70
From this it is clear that if the
balances under the new plan were
established by taking actual money
and putting it in the reserve banks
the actual release of cash as com
pared with the presant plan would
be the difference between the total
new reserve and the present reserve,
while If the reserve balances were
created by redlscounting the cash re
leased under the new p'an would bo
the difference between the cash re
quired to be held under the now plan
and the cash now actually held. That
would signify:
Maximum releane of cash, $268,473,589
Minimum release of cash... 127,3-15,754
At the same date mentioned above
the banking reserve in reserve cities
as held by the banks was:
Held in cash $250,383,926
Hold in balances... 232.799.C79
balances which would bo for tho re
servo cities as a group:
lolA '.n c.ftHh $175,128,701
Held in balanced 175,128,701
Total .$350,257 402
Comparing those figures with tho
present requirements as nlready
given It is scon hat tho new plan
might mean either a
Maximum relcaHo of caHh. . .$75,256,226
Or a maximum contrac
tion of cash 99,873,476
At the same date mentioned abovo
tho banking reserve in country banks
was held as follows:
Held in cash $280,392,177
Held in baluncos 310,689.129
Total $483,183,605
Under this bill these banks -7ould
have to hold in cash 9 per cent of
their net deposits subject to reserve
requirements and a like amount in
Total $600,081,306
Under this bill tho cash required
would be 5 per cent of their net de
posits subject to reserve require
ments and 7 per cent in balances (2
of thlstt the bank's discretion.)
This would mean:
To by held in cash $180,533,642
To bo held in balances 252,747,100
Total $433,280,742
On the same principle as before
this would mean a maximum release
or contraction as follows:
Maximum releaso $108,858,535
Maximum contraction 143,888,565
Thus it appears that thoro would
be a possible maximum contraction as
follows:
ReBervo city banks $ 99,973,476
Country banks 143,888,565
Total $243,862,041
Deduct central resorvo city
releaso 127,345,764
Net contraction $116,516,287
It is also ovident that tho result
might work out as follows:
Released by central re
sorvo city banks $268,473,589
Released by reserve city
banks 75,255,225
Rclca&cd by country banks 108,858,535
Total " 462,587,349
It might reasonably bo asked
which of theso results would prob
ably bo reached? Ahbuijio that the
first (contraction) was tho net re
sult owing to banks fulfilling their
reserve requirements by deposit!
cash in every Instanco. Tho govern-
mont balances which are now to hm,
poured Into trado channels through
tho now reserve banks will run from
$200,000,000 to $250,000,000. Bear
ing in mind tho fact that tho capital
of the now banks has to bo raised in
cash, it will bo seen that independent
of this capital tho monetary situation
would bo left about tho samo as It
1b today, except that tho now reserve
banks would be in position to add
their loaning power to that of older
banks. If we now assume that the
transfer of reserves resulted in the
extreme limit of expansion already
referred to, it would bo noted that
tho casli Is released only on the as
sumption that tho reserve require
ments arc mot by redlscounting. If,
however, the new reserve banks havo
to hold one-third in lawful money in
order to make theso discounts, it Is
clear that only two-thlids of $402,
587,349, or about $300,000,000, will
bo released. Of this sum a certain
part would bo needed In bringing
tho resorves of state banks which
may becomo members of tho now as
sociations up to tho level which is re
quired of them. How much this
would bo can not bo positively assorted.
If it bo asserted that this proceaa
will lead to inflation tho answer to
be made is that whether it will or
not is a matter in the hands of the
reserve banks, which havo it in their
power, by fixing their rate of dis
count suitably, to prevent tho banks
from creating reserve balances in ex
cess of tho required 5 per cent. If
the reserve banks should do this, It
would be found that tho required 5
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