The Centralization And Mobilization Of District Bank Reserves

Prior to the adoption of the Federal Reserve System, all national banks, as well as nearly all State institutions, were required to keep as a reserve a certain percentage of their deposits, usually between fifteen per cent, and twenty-five per cent., either in the vaults or such banks or in the central reserve banks denominated as such, the latter being situated in the larger cities of the country.

On June 31, 1917, an Amendment was passed to the Federal Reserve Act, requiring every bank, banking association or trust company belonging to the System, to maintain its entire legal reserve in the form of a deposit with the Federal Reserve bank of its district. Likewise, the reserve requirements of each member bank were materially made lower than the percentage required of each bank before the adoption of the System. This alone produced a great benefit to the country. Banks were able, thereafter, to make use of a larger amount of their deposits. On the other hand, concentration of the country's reserve money into a few large reservoirs made possible a much more efficient use of every dollar than under the old system of scattered reserves.

Use Of Reserve Money By Federal Reserve Banks

The Federal Reserve Banks, like other banks, though they are required by law to maintain a reserve of thirty-five per cent, against deposits, invest such funds in a way believed by them to be most profitable and most for the public good. Further, by the collection of such reserves, these banks are able to hold them in readiness in the form of money, commercial paper investments, or the like, so that in the event a need for money is found in any part of the country, the mechanism of the Reserve System enables the transfer of such funds from places of redundancy to places of scarcity, without any delay whatsoever.

Inter-District And Intra-District Mobility Of Reserves

We may now consider what is known as the inter-district and intra-district mobility of reserves. The former term signifies the mobility of reserves from one Federal Reserve District to another, and the latter, the mobility of reserves within the boundaries of one district.