Elasticity of bank credit involves something more than the powers intrusted to individual banks. It involves also the question of the organization of banks into a system. Sufficient emphasis has already been placed on the circumstance that the demand for bank credit varies absolutely and relatively from place to place and from time to time in the same place. The causes of this variation have also been discussed. Attention may be directed, therefore, to the means that may be provided for meeting such variation. As the extension of credit depends primarily upon the reserves available for the purpose, the ultimate factor in elasticity over the country as a whole is that of the system of reserves.

The bank reserves of a country may be fully centralized, partially centralized, or thoroughly decentralized. When there is a variation in place demand for bank credit the necessary adjustment can be made only when directly or indirectly the reserves on which credit is based flow from the place of small demand to the place of relatively larger demand. Variations in demand are reflected, of course, in the rates that are paid for credit advances, and the result of an easy flow of credit from the place of relatively small demand to a place of larger demand is a tendency toward uniformity in rates. The greater the mobility of reserves, or of the credit based on the reserves, the more closely will money rates over a country approximate uniformity.

The freest flow of bank credit would seem to be assured under a system of centralized reserves. Under such a system the net reserves of each community are represented by the claims that it may have, in the shape of deposit balances or of notes, against the central reserve agency. The redundant funds of one community may thus be easily and rapidly put at the service of the community with greater need. It is simply a question of a shifting of balances on the books of the reserve agency and of the security that may be offered for the desired advance by the community with the increasing need.

Elasticity of bank credit over country as a whole involves question of reserves

Mobility of reserves is necessary

Under a system of partially centralized reserves two possibilities must be considered. There may be a central reserve agency in which the banks deposit a part, but only a part, of their total reserves. In the absence of any supplementary expedients the mobility of credit would obviously depend upon the proportion of the total reserves so centralized. The second possibility is that of a system of relatively few independent banks with many branches, as in Canada. Here partial centralization arises from the fact that there are comparatively few independent banks. Under such a system it will be apparent that mobility depends upon the number of such banks and upon the diffusion of their branches.

Under a system of decentralized reserves - that is under a system of virtually independent banks each holding its own reserves - a free flow of credit from place to place is more difficult of achievement. Two possibilities suggest themselves. The banks may voluntarily establish effective interrelations over a wide area. This would permit a reapportionment of credit from place to place if the collateral circumstances - available security, business habits, etc. - were favorable. In the second place if bank credit is largely based on a standardized form of widely acceptable investments, which are freely offered by prospective "borrowers" in a relatively large open market, funds will also tend to flow to the place where the demand is greatest because of the willingness of such place to pay a sufficiently attractive rate. The larger the country, the more numerous its banks, and the greater the diversity of its population, of its industry, and of its trade, the less will be the likelihood of any achievement of real mobility under this system.

Freest mobility under centralized reserves

Mobility under partial centralization

Mobility under decentralized reserves

The variations in the demand for bank credit from time to time in any community require a reserve margin for normal variations, and facilities for strengthening reserves in periods of unusual stress. The individual bank must keep on hand sufficient reserves to meet the ordinary variations in demand that every bank encounters. That is to say, besides its mere till-money used to "cash" claims presented over the counter, a bank must reserve a fund which will, within limits, permit a further extension of its usual facilities. Inadequate emphasis is often put on this function of the bank's reserve.

Extraordinary increases of demand, however, necessitate a bank's seeking some outside aid. The maintenance by each bank of reserves large enough to meet unusual, as well as the ordinary, variations in demand would necessitate an unduly high average. This implies a loss of efficiency. In view of the fact that over a country as a whole these variations in demand will not be uniform or in the same direction, the problem of meeting them resolves itself, into one of a rapid compensatory shifting of credit from the places where demand may be relaxing to the places where it is strengthening. In essence, therefore, it is another aspect of the problem of variation in place demand.

As before, it may be pointed out that under a system of centralized reserves provision for variations in demand for bank credit from time to time in a given place may be easily made. By carrying the major portion of their reserves with one reserve-holding institution, upon which in turn each bank may rely for assistance when such assistance is needed, credit may be extended as the need arises. Under such circumstances the individual bank does not have to maintain a relatively excessive reserve. In times of abnormal pressure it may rely on the help of the central institution. Thus pressure on reserves in one locality may be distributed through the central agency over the whole area within which reserves are centralized. Ultimately the pressure may be sufficiently heavy to cause expansion of a country's credit as a whole, but in most cases the virtual shifting of reserves, from one community to another, through the mediation of the central reserve institution, suffices. Should reserves be only partially centralized the possibilities in this connection will, of course, be limited by the degree of centralization. In general the higher the degree of reserve centralization the greater are the possibilities with respect to mobility of credit.