The interest on the balances drew the funds to the reserve cities and then forced the reserve city banks to loan and invest them. The result was that the national banks as a whole kept on hand very small amounts of actual cash in excess of the minimum reserve requirements; or, stated more accurately, loans were extended as far as possible under the law. It was a case where the excess reserves were carried with reserve agents who were in competition and who were motivated primarily by the desire for profits, and who, therefore, from the pressure of competition had to make dangerous extensions of credit on the basis of such reserve balances. Instead of the balances being, as in theory they were and ought to be, carried for exchange purposes, and carried, too, in liquid shape and payable on demand, they were made the basis of a credit structure which toppled when the balances were recalled.
One of the considerations which the depositing bank had in view in maintaining such balances was to have a dependable source of accommodation in case it needed loans; but if the reserve bank had already loaned to the limit, its ability to support its clients was nullified. In the fall months from 1902 to 1912 inclusive, the reserves of the New York banks averaged 1.4 per cent above the minimum required, which stands in wide contrast to the reserves voluntarily kept by the central banks of Europe which assume the r61e of reserve agent. The banks in the reserve cities depended upon their secondary reserves and these proved very treacherous in falling security markets, when the call loan is inconvertible except at a sacrifice.