Maximum proportion of funds available for reserves should find lodgment in reserves

Diffusion of credit facilities necessary

The great desideratum, after a general use of bank credit is assumed, is, of course, elasticity. Elasticity of bank credit implies in first instance the development of the two forms of such credit when and where each may be needed. The failure to permit this free development means a disparity in rates from place to place and unfortunate fluctuations from time to time in the same place. The result is a high average rate that unduly taxes the country's industry and commerce.

Broadly speaking, the fulfilment of this requirement of elasticity depends first of all upon the original adaptation of the banking system to the economic life of the community. All the economic and social factors which have been alluded to in connection with the absolute importance of bank credit, its embodiment in the several forms, the reserves necessary to establish it, etc., must be carefully considered in the conscious ordering or reordering of a banking system. In other words, the banking superstructure must be adapted to the foundation on which it is to rest.

Taking this for granted, however, the question resolves itself into one concerning the provisions to be made for meeting fluctuations in demand. Fluctuations in the absolute demand for bank credit from place to place require mobility of such credit, but as the extension of credit is a question primarily of underlying reserves, mobility of credit means mobility of reserves.

It has already been demonstrated that mobility of reserves can best be obtained through mobilization of reserves. It is, of course, possible under a system of scattered reserves finally to equalize "pressure" on reserves as a whole through voluntary interrelationships established by banks, or through dealings in the market, but the more completely all the reserves are brought under one general management the more rapidly will readjusts ments be made, and the more uniform will be the rate. A dozen communities served by independent reservoirs may through a piping system connecting the reservoirs finally obtain uniform water pressure, notwithstanding differences between the communities in the consumption of water. But if the water in all the reservoirs were brought into one great reservoir there would never arise the necessity for equalizing the pressure between the communities. It would always be the same for all. The flow of credit as based on reserves constitutes an analogous case.

Elasticity the great desideratum

It depends first upon the adaptation of the banking system to the economic life of the nation

Assuming this, fluctuations in demand require mobility of reserves

Mobilization of reserves essential to mobility

Changes in the demand for bank credit from time to time in any given place may, when the country as a whole is taken into account, be regarded as a situation involving constant readjustments of place demand. Providing an elastic system to meet the variation in place demand is therefore essentially the same as providing for the variations in demand from time to time in the same place. From whatever angle the question is approached, the higher the degree of reserve centralization the greater is the possibility of delicate adjustment of credit facilities to need. Mobilization of reserves would appear to be, therefore, one of the first requirements of a good banking system.

It has been seen, however, that mobilized reserves to be effective must be accessible. Such accessibility involves for the individual bank the possibility on the one hand of obtaining, or on the other of transferring or liquidating, investments in adequate amounts to meet its changing needs. The several ways in which this might be done were set forth in a previous chapter. Here it may be said that the wider the possibilities in this respect the more efficiently will the banking system function. The outstanding advantages of an open discount market lead, of course, to an emphasis on this expedient, but it must be remembered that the creation of an open discount market depends upon the availability of the proper kinds of discounts, and upon business customs and outlook that promote the utilization of such a market. Some of these factors are within government control while others are not. But in addition to a discount market there is the possibility of direct borrowing, with or without collateral, by the individual bank from other banks or from the reserve-holding authority. The freest possible arrangements here naturally assure the most rapid readjustments. A good system will therefore, with due allowance for safety, provide for the individual bank as many as possible means of access to centralized reserves.

Mobilized reserves must be made accessible

But in addition to the variations in the absolute demand for bank credit there must be taken into account the variations in the relative demand for the two different forms. In a good banking system demand should be able to shift from one form to the other and should be met with a minimum of friction. In discussing this point before, attention was called to the fact that in general the transformation of note credit into deposit credit offers no difficulty. In times past the difficulty has been found in connection with the reverse transformation. This difficulty has grown out of the measures adopted to regulate and control note issue. Hence, as already indicated, the degree to which deposits can be readily converted into notes depends upon the regulation of note issue. Note issue is usually based either on a monopolistic system or on a system of competition. If the transformation of deposits into notes were alone to be taken into account there would be no occasion to put special emphasis upon either the monopolistic or the competitive system of note issue. The necessary transformability can be achieved under either system as long as the requisite collateral measures are provided. But in view of the importance of centralization of reserves in connection with other significant aspects of the banking system, that system of note issue should be provided which harmonizes most thoroughly with reserve centralization. This, as was seen, is a system of essentially monopolistic control of note issue, not because there is any inherent virtue in monopolistic issue which renders it superior to competitive issue, but because competitive issue is incompatible with thorough-going reserve centralization.