Bank reserve

“ Should we be fortunate enough to secure a right kind of banking system in this respect, we could almost double our bank reserves, that is, make them twice as large, and yet make two or three times as much profit on that part of the banking business, growing out of the substitution of credit notes for reserves, and at the same time be [Pg 361] vastly better able to protect the balance of our business from disturbance due to the fact that we are compelled to use reserve money for currency purposes. ”

“ With a given amount of money a certain proportion of it can be used for bank reserves on which to build credit transactions. For a time the volume of business will increase more rapidly than the money supplies, so that the proportion of credit business to the whole will increase, the improvement of the credit machinery in the meantime facilitating the movement. But the perfection of the facilities for utilizing to the utmost a given reserve, or a slowly increasing one, will come to a stop after a time, and it will be necessary to increase the money supply for any further expansion of credit. ”

“ Other influences, such as changes in the public's currency holdings, may persist for longer periods of time.
Still other variations in bank reserves result solely from the mechanics of institutional arrangements among the Treasury, the Federal Reserve Banks, and the depository institutions. The Treasury, for example, keeps part of its operating cash balance on deposit with banks. ”

“ The strain, too, on our banking reserve which is caused by the demands of the bill brokers, is also more dangerous than it would be under a natural system, because that reserve is in itself less. The system of keeping the entire ultimate reserve at a single bank, undoubtedly diminishes the amount of reserve which is kept. ”

“ Now, the only source from which large sums of cash can be withdrawn in countries where banking is at all developed, is a 'bank reserve.' In England especially, except a few sums of no very considerable amount held by bullion dealers in the course of their business, there are no sums worth mentioning in cash out of the banks; an ordinary person could hardly pay a serious sum without going to some bank, even if he spent a month in trying. All persons who wish to pay a large sum in cash trench of necessity on the banking reserve. ”

“ Now every addition to the deposits, is really an addition to the unemployed reserve of unrepresented notes in the Bank; in proportion, therefore, as money becomes abundant with the public, the Bank reserve increases; so that it very speedily exceeds the amount which the ordinary rules of sound banking would hold to be necessary for discharging the functions of a reserve. In such circumstances it becomes the immediate interest of the Bank to force the superabundant notes of the reserve again into circulation ”

“ Too much reserves only means a small loss of profit, but too small a reserve may mean ruin. Credit may be at once shaken, and if some terrifying accident happens to supervene, there may be a run on the banking department, that may be too much for it, as in 1857 and 1866, and may make it unable to pay its way without assistance, as it was in those years." And again he writes: "Why should a bank keep any reserve? Because it may be called upon to pay certain liabilities at once and in a moment." ”

“ A bank like the Bank of England must always, therefore, be on the watch for a rise, if I may so express it, in the apprehension minimum; it must provide an adequate fund not only to allay the misgivings of to-day, but also to allay what may be the still greater misgivings of to-morrow. And the only practical mode of obtaining this object is—to keep the actual reserve always in advance of the minimum 'apprehension' reserve. ”

“ I have tediously insisted that the natural system of banking is that of many banks keeping their own cash reserve, with the penalty of failure before them if they neglect it. I have shown that our system is that of a single bank keeping the whole reserve under no effectual penalty of failure. ”

“ The keeping the single banking reserve being a national function, it is at least plausible to argue that Government should choose the functionaries. No doubt such a political intervention is contrary to the sound economical doctrine that 'banking is a trade, and only a trade.' But Government forgot that doctrine when, by privileges and monopolies, it made a single bank predominant over all others, and established the one-reserve system. ”

“ When the check drawn by the borrowing depositor may be deposited in other banks and collected by them against the lending bank, its granting of credits rapidly draws down its reserves to swell the reserves of its competitors. One hundred thousand dollars of new reserves may not mean to it an increase of lending power of more than, say, $125,000. For banks in the aggregate, however, this increase of reserves brings its full several-fold increase of lending power, provided that all the reserve efficiency is utilized in whatever bank it rests. ”

“ The member banks should look upon the reserve bank not as an alien but as their own institution. They own all its capital and most of its resources, and they control its management through the directors they elect, subject always to the supervision of the Reserve Board. At the reserve bank they may borrow as a standing right and not as a favor which may be cut off. They no longer have to buy or carry bonds to serve as security for loans; the paper of their own customers, large or small, will now serve as their security. ”

“ Whatever persons—one bank or many banks—in any country hold the banking reserve of that country, ought at the very beginning of an unfavourable foreign exchange at once to raise the rate of interest, so as to prevent their reserve from being diminished farther, and so as to replenish it by imports of bullion. ”

“ If you say that the Bank shall always hold one-third of its liabilities as a reserve, you say in fact that this one-third shall always be useless, for out of it the Bank cannot make advances, cannot give extra help, cannot do what we have seen the holders of the ultimate reserve ought to do and must do. There is no help for us in the American system ”

“ As far as the American banking system is one of many reserves, I have said why I think it is of no use considering whether we should adopt it not. We cannot adopt it if we would. The one-reserve system is fixed upon us. The only practical imitation of the American system would be to enact that the Banking Department of the Bank of England should always keep a fixed proportion—say one-third of its liabilities—in reserve. ”

“ But at any rate there should be no doubt whose duty it is. Upon grounds which we have often stated, we believe that the anomaly of one bank keeping the sole banking reserve is so fixed in our system that we cannot change it if we would. The great evil to be feared was an indistinct conception of the fact, and that is now avoided. ”

“ That every national bank shall carry a cash reserve of 20 per centum of its deposits from banks, or upon its bank balances.
Comment:—There is no doubt whatever that banks should carry larger cash reserves against bank balances than against those of individuals. The banks of Europe which carry such balances carry all the way from 33 per cent up to 50 per cent. ”

“ The Bank cannot stay still and wait till its bills are paid, and so fill its coffers, for unless it discounts equivalent bills, the bills which it has already discounted will not be paid. When the reserve in the ultimate bank or banks—those keeping the reserve—runs low, it cannot be augmented by the same means that other and dependent banks commonly adopt to maintain their reserve, for the dependent banks trust that at such moments the ultimate banks will be discounting more than usual and lending more than usual. ”

“ Even any danger of war would at once reduce them in value. Let us call this risk another burden of one per cent. on the circulation.
Next, every bank in seventeen or eighteen of the largest cities—Boston among the number—are required to keep on hand, at all times, a reserve—in dead capital (legal tenders) —"equal to at least twenty-five per centum," and all other banks a similar reserve "equal to at least fifteen per centum," "of the aggregate amount of their notes in circulation, and of their deposits." ”

“ Your Federal reserve banks which are intended to be the equivalent of the Central banks of other countries, such as the Bank of England, Bank of France, and the Reichsbank, should be prepared to rediscount approved bills at all times and to any extent.
The advantages to you of such a market would be the same [Pg 710] advantages that we possess, namely, liquid employment for short money; power to meet demands for money without disorganizing stock exchange prices; power to check overtrading at home, and finally, power to check a foreign drain of gold. ”

“ If the reserve of the bank is already at the minimum it must stop discounting or must strengthen its position by recovering the cash withdrawn from its coffers. Now it is obvious that if the amount of money withdrawn is kept in the current of business where the banks can get at it, they of course can strengthen their position again immediately, and not only always keep themselves well away from the danger line of minimum reserve, but be always prepared to meet the needs of the money market. ”

“ Most businesses probably hold even smaller amounts of currency in relation to their total transactions than do individuals.
Since the most important component of money is transaction deposits, and since these deposits must be supported by reserves, the central bank's influence over money hinges on its control over the total amount of reserves and the conditions under which banks can obtain them. ”

“ III.24 Since, then, insufficiency of cash is so troublesome a condition,—so difficult to escape when it has arrived, and so difficult to forestall when it begins to approach,—a bank must so regulate its loans and note issues as to keep on hand a sufficient cash reserve, and thus prevent insufficiency of cash from even threatening. It can regulate the reserve by alternately selling securities for cash and loaning cash on securities. The more the loans in proportion to the cash on hand, the greater the profits, but the greater the danger also. ”

“ Each bank with a deposit in another bank assumes that, in case of need, it can strengthen its reserve by drawing upon this deposit; but it fails to consider that, when thus it strengthens its own reserve, it must to the same extent weaken the reserve of the other bank, and that the deposits of banks with other banks add no strength to the general credit situation. Each bank that has loaned money on call assumes that, in case of need, it can strengthen its reserve by calling such loans ”

“ If the sums owed to individual depositors are large, relatively to the total liabilities, the reserve should be proportionately large, since the action of a small number of depositors can deplete it rapidly. Similarly, the reserves should be larger against fluctuating deposits (as of stock brokers) or those known to be temporary. The reserve in a large city of great bank activity needs to be greater in proportion to its demand liabilities than in a small town with infrequent banking transactions. ”

“ The central bank not only carries a reserve which is far in excess of immediate requirements in ordinary times, but also uses this reserve boldly in times of stress, presenting in both these respects a marked contrast to the policy of American banks. As a result, European business men need not fear either a refusal to lend or a restriction of payments by the banks on which they depend. And panic has small chance to develop where the depositor can get his money at need and the solvent business man can borrow. ”

“ A good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times.
Ordinarily discredit does not at first settle on any particular bank, still less does it at first concentrate itself on the bank or banks holding the principal cash reserve. These banks are almost sure to be those in best credit, or they would not be in that position, and, having the reserve, they are likely to look stronger and seem stronger than any others. At first, incipient panic amounts to a kind of vague conversation: Is A B as good as he used to be? ”

“ A country bank dealing with the farmers might require the smaller amount, while a bank dealing entirely with bankers would require the largest possible reserve, to meet any emergency at any time. Each individual bank must be judged by itself and its reserves adjusted accordingly. ”

“ And such banks would meet an incipient panic freely and generously; they would advance out of their reserve boldly and largely, for each individual bank would fear suspicion, and know that at such periods it must "show strength," if at such times it wishes to be thought to have strength. Such a system reduces to a minimum the risk that is caused by the deposit. If the national money can safely be deposited in banks in any way, this is the way to make it safe. ”

“ The reader should be mindful that deposits and reserves tend to expand simultaneously and that the Federal Reserve's control often is exerted through the market place as individual banks find it either cheaper or more expensive to obtain their required reserves, depending on the willingness of the Fed to support the current rate of credit and deposit expansion. ”