The amounts and distribution of reserves under the Acts of 1887, 1913, 1917, and 1918, are shown in the table on page 403.

Effects Of Federal Reserve System On Reserves

The chief effects of the new system upon reserves held by member banks against deposits may be summarized as follows:

1. Availability And Hence Reduction Of The Reserves.

2. Concentration Of Reserves.

3. Decentralization Of Bank Balances In Central Reserve Cities.

4. Cessation Of Interest Payments.

Each Of These Advantages Will Be Discussed Seriatim.

1. Reduction Of Reserves

Amount and Distribution of Reserves Against Deposits in National and Member Banks

Central

Reserve

City

Banks

Reserve City Banks

Country Banks

(a) Under the National Bank Act as amended in 1887:

Amount:

Against all deposits............

25%

25%

15%

Distribution:

Minimum proportion in its own vaults.........

All

1/2

6/15

Maximum proportion in approved reserve city banks and central reserve city banks.........

1/2

9/15

(b) Under the Federal Reserve Act, December 23, 1913:

Amount:

Against demand deposits.......

18%

15%

12%

Against time deposits.........

5

5

5

Distribution:

Minimum proportion in its own

6/18

After 12 18 24 30 36 There-mo. mo. mo. mo. mo. after 6/15 6/15 6/15 6/15 6/15 5/15

After 12 18 24 30 36 There-mo. mo. mo. mo. mo. after 5/12 5/12 5/12 5/12 5/12 4/12

Minimum proportion in the fed-eral reserve

7/18

3/15 4/15 5/15 6/15 6/15 6/15

2/12 3/12 4/12 5/12 5/12 5/12

May be carried in its own vaults or in federal reserve bank.....

5/18

6/15*5/15* 4/15* 3/15* 3/15* 4/15*

5/12 4/12 3/12 2/12 3/12 3/12

(c) Under the Amendment of June 21, 1917:

Amount:

Against demand

13%

10%

7%

Against time deposits .........

3

3

3

Distribution:

In federal reserve bank..........

All

All

All

(d) Under the Amendment of September 26, 1918:

Amount:

Against demand deposits: Down-town banks.....

13

10

7

Outlying banks.....

10

7

7

Against time deposits .........

3

3

3

Distribution: In federal reserve bank..........

All

All

All

* Or in central reserve city banks. Or in central reserve city banks and reserve city banks.

As has been shown, the minimum percentages, particularly against time deposits, have been reduced by the new system. This reduction is warranted for many reasons - because the reserves are now concentrated and rendered more efficient, because they are freed from "float," because they are located in a central bank which feels its responsibility, and because they are kept in cash form or invested in highly liquid forms. Their availability is unquestioned. The reserves in all twelve federal reserve banks are now available at any one of the twelve, if the Federal Reserve Board is disposed to require one of them to rediscount paper held by another; such rediscounting would decrease the reserve balance of the buying bank and increase that of the selling bank. The till money which formerly counted as reserve is now held in addition to the required reserve, and therefore the change in many banks is probably only nominal.

The actual reductions of the reserves accomplished by the Federal Reserve Act are commonly exaggerated. During the five years preceding the Federal Reserve Act the ratio of the existing reserves that could be considered legal reserves to the net deposits for all national banks ranged from 19.6 to 21.7 per cent. At the same time the ratio of the aggregate lawful money held by the banks to the aggregate net deposits ranged from 12.4 to 13.8 per cent. The system of redeposited reserves therefore made an actual cash reserve of about 13 per cent appear as a legal reserve of about 21 per cent. One dollar of cash then would support about $8 of deposits.

The ratio of reserves to net deposits for all national banks at the time of the calls of the Comptroller during 1918 and 1919 ranged from 10.02 to 10.46 per cent. One dollar of reserve balance supported about $10 of deposits for the member banks. The possible expansion of deposits within the legal requirements is not much greater. The federal reserve banks must keep reserves of 35 per cent against their deposits and 40 per cent against their federal reserve notes. One dollar of gold will support about $2.50 of deposits and notes. But the amount of deposits in the federal reserve banks actually averages about two-thirds of the amount of the federal reserve notes; that is, for every increase of $3 of notes there is an increase of $2 of deposits. If, therefore, notes did not increase when deposits increased, $1 of gold in the federal reserve bank would support 10 X 100/35, or about $29, of deposits in the member banks; but since in fact, on the average, an increase of $2 in deposits is accompanied by an increase of $3 in notes, $1 gold in the reserve bank will support 2/5 of $29, or about $11.50, of deposits in the member banks. It appears, therefore, that $1 gold now will support about $11.50 of deposits, whereas before 1914 it would support $8. The efficiency of the reserves is therefore increased but little by the lowering of the legal requirements; the fundamental improvement has come by way of concentration of reserves, the issue of elastic notes, and the protection of reserves by discount operations.