Bank notes pass freely from hand to hand

Deposits and notes from the point of view of the public

Bank checks

The limitations of the check

Uncertainty as to account or balance

The confidence that underlies the acceptability of the check as a means of payment is really twofold. There is first the confidence in the maker's integrity and solvency. This has already been referred to. There is next the confidence in the bank on which the check is drawn. After all, the check represents merely the transfer by the depositor of the right to demand money, while the important thing to the payee is the ability to obtain money should he really need or want it. Hence, the payee must have faith in the maker of the check, and also a more fundamental faith in the immediate willingness and ability of the bank on which it is drawn to pay the sum called for should the check be presented. Such faith must also characterize the depositor if he is to maintain rather than draw down his deposit.

One of the important elements in the preservation of this confidence is the cash reserve maintained by the bank. The right to demand cash is satisfactory as a substitute for cash itself only in so far as it is instantly redeemable. Individuals may recognize and understand that a bank has outstanding against it more rights to demand cash than the sum-total of cash available for redeeming the rights, and each one may know that not all possessing such rights will at any given moment exercise them, yet each one believes that should he himself actually want cash the required sum would be instantly forthcoming. Such a belief is possible only when there is general assurance that an adequate sum of cash is kept constantly on hand, and while this cash may thus seem to be lying useless and inactive, as a matter of fact it is doing, through the credit instruments based on it, a highly intensified work.

Acceptability narrowly circumscribed

Confidence underlying check is twofold

The "reserve" is important for this purpose

The circumstances determining the adequacy of a given cash reserve against deposit liabilities are numerous and complex. Most of them also are subject to variation, and long experience is necessary to gauge them accurately. What is a perfectly safe and adequate reserve today may be quite insufficient and disquieting tomorrow. In general it may be said that the amount of reserves required by a bank depends upon the habits and business conditions of the community in which the bank is operating, and more particularly upon the kind of clients that it has and the nature of their several businesses. Thus in a manufacturing and commercial community where exchanges are numerous and rapid it might be necessary, other things being equal, to maintain a relatively larger reserve than would be required in an agricultural community where exchange transactions are much less frequent. On the other hand, as in the crop-moving season in the country, it may be necessary to maintain a larger reserve at one time than at another. Again, where the use of checks is widespread and where the banks need anticipate only a relatively small demand for hand-to-hand currency, smaller reserves are required than would be the case if the use of hand-to-hand money predominated. Finally, without attempting to do more than to suggest a few of the more important influences, it may be said that where a bank has relatively few but large depositors it is apt to need a larger reserve than a bank with numerous small accounts, because the more numerous a banks clients the less likelihood is there of any general movement in the deposits, and the greater are the chances of an approximate balancing of income and outgo. Considering only the few influences that have been referred to, it will be readily agreed that the calculation of a proper reserve is a delicate as well as an important task.

Many circumstances influence reserve requirements

A circumstance that adds materially to the difficulty involved in calculating the reserve is the conflict of motives that harasses the banker in the process. The smaller the reserve that is necessary the greater is the lending power and possible profit of the bank. This will be readily seen in the following example. Assuming a 25% reserve to be necessary, a cash deposit of $100,000 leaves a sum of $75,000 available as the required reserve for advances in the shape of deposit credits. In this case the loanable resources of the bank are increased $300,000. At a rate of 6% per annum that would mean an annual return of $18,000. But if a 10% reserve were adequate such a cash deposit would release $90,000 for reserve purposes, which sum would permit an increase of loanable resources of $900,000. Here at 6% per annum the annual returns would be $54,000! But every weakening of the reserves leaves the bank more vulnerable in case of an enlarged demand for actual cash or of increased withdrawals which result in heavy debit balances at the clearing house. Inability to meet the demands for cash or the debit balances at the clearing house spells failure for the bank, and avoiding failure is, of course, even more important to the banker than heaping up profits. Without surcease, however, the lure of profit tempts the banker from the path of safety and security.

If the banker properly apprehends his function there is also something more than safety to be taken into account in the management of the reserves. In the division of social labor a certain function is assigned to the bank, and the community at large depends on the bank properly to exercise that function. The social significance of this function will be subsequently referred to, but here it may be said that it is the business of the bank to extend credit.

There is a conflict of motives in the management of the reserves

Variation in the demand for credit facilities must also be provided for

The relation of the reserves to the credit so extended has been sufficiently set forth, but attention may be called to the fact that the demands on the bank for credit are not constant. In normal times a certain average demand may be made on the bank and a given reserve may be adequate to supply the necessary facilities. But there are times when the demand increases, when the bank is called upon to render additional and unusual services to the community through the extension of credit facilities beyond the normal. For this the bank should be prepared. That is to say that besides the normal till-money necessary to meet the ordinary demands over the counter and at the clearing house from day to day, the bank should have a real "reserve" that will enable it to expand its operations when there is a need in the community for additional facilities. It is this idea of providing for a special and unusual strain that is suggested by the very word "reserve." We may thus amend what was said above concerning the conflict between safety and profits in the management of the reserves by adding to safety, in the balance against profits, the desire for full and conscientious service.