(1) We have no provision for the concentration of the cash reserves of the banks and for their mobilization and use wherever needed in times of trouble. Experience has shown that the scattered cash reserves of our banks are inadequate for purposes of assistance or defense at such times.

This criticism is hardly in need of further elucidation, It calls attention to the evil that had long been recognized as one of the most serious in our banking system. Instead of permitting, through reserve centralization, the free flow of credit according to the fluctuations in demand, the old system required each bank to keep a large proportion of its reserves in its own vaults. In times of trouble, far from having a distribution of reserves that promised the maximum service for the country at large, there was a strong incentive to each bank to buttress its own position by drawing to itself the maximum supply of reserve funds. This led to needless accumulation in some quarters and dangerous weakening in others. It was often remarked in the United States that in times of trouble the banks themselves were the worst hoarders.

The depositing of a proportion of the required reserves in central reserve or in reserve cities, as permitted by the national banking law, did not necessitate any qualification of the criticism. While no mean proportion of the country's bank reserves tended to go to New York they were not in that city under a centralized control that insured maximum usefulness. Moreover, the New York banks treated bank deposits as they did the deposits of individuals, and the sending of reserves to New York tended, therefore, to result simply in further pyramiding of credit rather than in mobilization for more adequate security, or for the more uniform distribution of credit facilities among different communities. While the New York banks made advances to their correspondents such advances were on the basis of average balances maintained rather than on that of need. Finally when the outlying banks began to draw down their balances the New York banks were powerless to stop them, and were usually the first ones to be embarrassed by the reserve movement.

No banking "system" in the United States

Scattered reserves

(2) Antiquated federal and state laws restrict the use of bank reserves and prohibit the lending power of banks at times when, in the presence of unusual demands, reserves should be freely used and credit liberally extended to all deserving customers.

This criticism referred to the laws which forbade the banks from extending any new loans if reserves dropped below the prescribed minima. In other words, these laws regarded reserves simply as "till-money" to be paid out over the counter rather then as a real vault reserve for the extension of additional credit facilities when occasion demanded.

(3) Our banks also lack adequate means available for use at any time to replenish their reserves or increase their loaning powers when necessary to meet normal or unusual demands.

The reference here was to the fact that practically each bank stood alone. There was no direct centralization of reserves, and there were no market practices that permitted reserve mobilization indirectly. The limited possibilities of direct lending could not eliminate anxiety when trouble appeared even faintly on the horizon, ana, as already indicated, the suggestion of trouble often resulted in panicky hoarding.

"Deadline" reserve requirements

No reserve strengthening facilities

(4) Of our various forms of currency the bank note issue is the only one which we might expect to respond to the changing needs of business by automatic expansion and contraction, but this issue is deprived of all such qualities by the fact that its volume is largely dependent upon the amount and price of United States bonds.

This criticism is based on the fact that the expansion of note issue for a national bank required an equivalent investment in United States bonds. Speculative changes in the price of bonds thus reacted upon the issue of notes. Moreover, with a low rate of interest on the bonds, taking into account the cost of issuing notes, it did not pay the banks to issue more notes than could be pretty definitely expected to remain in circulation. In like manner, the limitation on the redemption of notes acted against any attempt to expand note issue to meet merely temporary rather than permanent increases in demand. Furthermore, the amount of bonds available for note issue did not vary with the fluctuating currency needs of trade but with the revenue needs of the government. Hence, instead of expanding and contracting with the changing needs of industry and commerce, our national bank-note issue tended gradually to increase. Indeed, instead of being "elastic" it was perversely elastic, tending to expand when reserves were excessive and to contract when reserves declined.

(5) We lack means to insure such effective cooperation on the part of the banks as is necessary to protect their own and the public interests in times of stress or crisis. There is no cooperation of any kind among banks outside the clearing-house cities. While clearing-house organizations of banks have been able to render valuable services within a limited sphere for local communities, the lack of means to secure their cooperation or affiliation in broader fields makes it impossible to use these or similar local agencies to prevent panics or avert calamitous disturbances affecting the country at large. The organizations have, in fact, never been able to prevent the suspension of cash payments by financial institutions in their own localities in cases of emergency.

Inelastic currency

Absence of cooperation

Here another phase of the "scattered reserve" situation is emphasized. The public interest in times of stress and crisis requires a liberal extension of credit in order that fears may be quieted and anxieties be allayed. The necessity of self-protection when no opportunity for aid is assured tends, however, to lead the banks to restrict credit and to hoard reserves. Through the issue of clearing-house loan certificates the banks in the larger centers were able to pool reserves and to be of mutual assistance. But these loan certificates were palliatives and not preventives, and were efficacious, moreover, only in the payments between members of the same clearing house. While locally effective their sphere of usefulness was narrowly restricted.