Reserve (finance)

“ In case the reserve is more than the value of the asset at the time of discard, it means that more than the cost of the asset has been charged as expense. Accordingly, the excess represents real profit and must be transferred to surplus. ”

“ As a distinctive banking term, “reserve” is used to indicate the amount of cash and cash items on hand and on deposit which under the law may be counted as a cash reserve fund held against deposits and note issues. This use of “reserve” is limited strictly to financial institutions.
We find also various so-called reserves shown on the commercial balance sheet, both among the liabilities and the assets. As deductions from the assets are the various depreciation reserves and reserves for bad and doubtful accounts and notes receivable. ”

“ 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. ”

“ Now, mark you, I have not pursued this expansion, this inflation, beyond the 50 per cent gold reserve for all the liabilities of the reserve association. When you turn your imagination to all the possibilities remaining in rediscounts, borrowing direct, acceptances and falling in your reserves, and the credits which grow out of credits directly and indirectly, the prospect becomes bewildering. ”

“ Cash-surrender value is the reserve less a surrender charge. And in case of a single-premium policy the reserve is the face amount of the contract discounted at a specified rate of interest on the basis of the insured's expected life. ”

“ In the first place, the very magnitude of the country's resources has been a favorable factor. The unparalleled prosperity of the past decade has made possible the accumulation of a vast reserve in the case, not only of the great corporations, but also of the average business man. This reserve has acted as a buffer to the shock of reaction, and has softened the impact through a speedy restoration of confidence in the excellence of the country's assets and in the real solvency of business. ”

“ 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. In the long run a bank maintains its necessary [Pg 145] reserve by means of adjusting the interest rate charged for loans. If it has few loans and a reserve large enough to support loans of much greater volume, it will endeavor to extend its loans by lowering the rate of interest. ”

“ Their opportunities and earnings are relatively small, and in order to live they must figure closely. They feel the loss of interest on reserve deposits; the absence, as yet, of dividends on their capital contribution; and the prospective loss or decrease of the exchange they generally charge on remitting for checks drawn upon them. Many banks in industrial centres are precluded by the activity of their business from taking advantage of the reduction in the required reserve. ”

“ 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 ”

“ 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. ”

“ One—Nothing should ever be counted as a reserve which is not coined out of the standard of value. Our standard of value is gold, therefore nothing should go into the reserves of our banks except gold. ”

“ 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. ”

“ For generations of banking the reserve deposits of banks have always drawn a minimum rate of at least 2 per cent per annum. Why? Because of their size and because of their stability. Experience of generations had demonstrated the fairness and the wisdom of that usage. Reserve deposits rarely fluctuate—except upwards.
But at a few strokes of a pen Federal Reserve oligarchs reversed the custom of generations and conscripted this mass of deposits—the largest on earth—into their coffers without interest! ”

“ As stated above, the basic purpose of the creation of the reserve is to burden the product with depreciation charge as a real part of the cost of production. If we are concerned with real and actual costs of production, by no stretch of the imagination can replacement cost—what it might cost to replace the asset at some more or less distant time—enter into the question. ”

“ It is coming to be a recognized principle that every business enterprise of [9] whatever kind or size should establish a reserve fund. It is felt that the possession of a reserve fund puts the business upon a secure foundation, adds to its financial strength and reputation, and greatly increases its credit and borrowing capacity. ”

“ That is, if market is lower than cost, at the close of a fiscal period, surplus is charged and the reserve credited for the difference. On the balance sheet the reserve is treated as an offset to the investment account carried at cost. This incorporates the market valuation as a significant figure of the balance sheet and shows the cost for purposes of information. The charge to surplus avoids fluctuation in the current profit and loss results because of an unrealized item and so makes it more useful for comparative purposes. ”

“ The total reserve is essential to the solvency of the company and the payment of all the policies as they fall due. The companies which issue policies on the level premium plan or reserve plan are known as "old line" companies, or as "legal reserve" companies, because the state laws require every company of this type to maintain the reserves calculated on the basis of a certain rate of yield. The growth of the legal reserve companies in recent times constitutes one of the financial marvels of the age. ”

“ At this time a company might be formed in France, Germany, &c. who would form a stock of one hundred thousand pounds sterling, to defray the expense of this settlement. By such a step, you, in the first place, extend the circle of your connexion and influence. You increase the number of your inhabitants, proportionably lessen the common expenses and have in the reserve a fund for public exigencies. ”

“ 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. ”

“ 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 public thus saves over seven million dollars of annual interest, and secures a safe and convenient medium of exchange, and has the assurance that a sufficient reserve in coin will be retained in the treasury beyond the temptation of diminution, such as always attends reserves held by banks. ”

“ The reserve fund was created primarily to make good any deficiency in the revenues below the amount required to pay the interest due. If such drafts upon the reserve fund become necessary, they are to be made good in the following years out of the surplus above mentioned. The reserve fund is increased by the interest it may earn, but when the capital amount of the fund reaches £T2,000,000 the interest earned is merged in the general receipts of the public debt administration. ”

“ In the case of a demand on their reserve, the banks will draw out their deposits, in notes, or, if gold be in demand, in gold, from the Bank of England. Whether, therefore, the reserve of a bank is invested in Government securities or is deposited in the Bank of England, or is in Bank of England notes, it is from the coin in that bank that the gold comes in the case of a run. ”

“ But, on the contrary, there is no country at present, and there never was any country before, in which the ratio of the cash reserve to the bank deposits was so small as it is now in England. So far from our being able to rely on the proportional magnitude of our cash in hand, the amount of that cash is so exceedingly small that a bystander almost trembles when he compares its minuteness with the immensity of the credit which rests upon it. ”

“ It is true that if the periodic amounts of the estimate for depreciation and the sinking fund are practically the same, and if provision is made only for the sinking fund reserve, there will be in that reserve a sufficient amount to care for the depreciation. Assuming the life of the asset and the life of the bonds to be the same, such a policy means simply that the asset, usually a fixed asset, has been converted by use into current funds which have been applied to the liquidation of the bonds. ”

“ This, you will remember, is due to the fact that we have no real economic reserve in the United States today. All the reserves are loaned out all the time.
Let me call your attention to what my position will be, under the bill we have prepared.
First: I shall be able to furnish all the currency I [Pg 473] need, by simply converting book debts or deposits into note debts or currency, up to twice the amount of my capital, if necessary. That is, I can regularly issue $100,000, the amount of my capital, and by going to my Board of Control, $100,000 additional. ”

“ A larger amount of money is needed in this country because, in the first place, our prices range higher. If the prices of articles commonly consumed range 20 per cent. higher than they do abroad, the people who buy them and pay for them with money need a larger amount to make their purchases. The same cause makes a larger reserve necessary to exchange a given volume of goods by credit. The demand for money, therefore, both for reserve and direct money transactions, is greater on account of the higher scale of prices. ”

“ Do you consider that when your deposits are materially on the increase it is necessary to keep a larger amount of money in reserve than you would keep at other times?—I may say that, as a general rule, our reserve would always bear some proportion to our deposits.
Total Lodgments with London and Westminster Bank; also Amount of Cash in Hand, Moneys with Bill Brokers at Call, and Government Securities held by the Bank.
1191. Do you employ your money in the discounting of bills for other persons than your own customers?—Discount brokers. ”

“ The gold which comes to them in the course of banking operations will be added thereto; and almost imperceptibly the country banks will arrive at the condition of the city banks, whose reserves in coin and legal-tender notes are now far beyond the requirements of law. In the mean time, and without derangement of business, the Treasury may strengthen its reserve,—while, on the other hand, the quiet reduction of its liabilities advances the percentage of the reserve to the whole amount of liabilities in almost a compound ratio. ”

“ Section 404 (a) now requires FSLIC to establish two reserves, namely, a Primary Reserve 'which shall be the general reserve,' and a Secondary Reserve. The requirement for the annual premium of 1/12 of 1% is continued, but the level of the general reserve was lowered from 5% to 2% of the total of accounts plus creditor obligations. ”

“ 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. ”

“ Now, I assert, and challenge any man to deny it, that if any good debt is fit to be used for reserve money, then every good debt is equally fit. If a Government debt is good reserve money, then New York State debts, Pennsylvania, Illinois, and all state debts; and if all state debts, then New York city, Philadelphia, Chicago and all city debts; and if New York, Chicago and Philadelphia debts are good reserve money, then the United States Steel, Standard Oil and all corporation debts ”

“ 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. ”

“ One is simply to let the reserve alone so long as it remains in excess of a specified safe minimum and to replenish it only when, if ever, it falls below that minimum, i.e. to keep the indefinite-reserve system until a definite-reserve system became necessary. ”