Under the National Bank Act no bank was required by law to carry any reserve with banks in reserve or central reserve cities, but it was permitted to do so if it found it advantageous. No bank, however, kept its entire reserve in its own vaults. Every bank found it necessary to carry balances with other banks in the larger centers of trade to facilitate the domestic exchanges and to accommodate their customers in making settlements at a distance. These balances were essentially checking accounts against which the local banker sold domestic exchange and which he would have had to carry irrespective of whether they counted as reserves; it was a particular favor to the banks to permit such balances to be regarded as part of their required reserves. To count them as reserves rested upon the assumption that they were available upon demand and, in turn, that the reserve bank kept them in liquid form.

Chart Showing System Of Redeposited Reserves

Country banks:

Received deposits from:

Individuals, Etc.

State Banks And Trust Companies

The Government

The Reserve Required Was 15 Per Cent

The reserve was to be carried:

2/5, or more, in its own vaults

Central Reserve City Banks

3/5, or less, in reserve city banks

Reserve city banks: :

Received deposits from: : :

Individuals, Etc.

State Banks And Trust Companies . .

The Government . .

Country Banks

The Reserve Required Was 25 Per Cent. .

The reserve was to be carried:

1/2, or more, in its own vaults

1/2, or less, in central reserve city banks

Central reserve city banks:

Received deposits from: . Individuals, etc.

State Banks And Trust Companies

The Government . ,

Reserve City Banks

Country Banks

The Reserve Required Was 25 Per Cent.

The Reserve Was To Be Carried In Its Own Vaults.

Each country bank chose one or more reserve agents in one or more reserve and central reserve cities, and each reserve city bank chose one or more reserve agents in one or more central reserve cities. These agents were commonly spoken of as "correspondents" - New York correspondent, Pittsburgh correspondent, etc. Very intimate co-operative relations were developed between the correspondent and customer banks. Out of consideration for the balance carried the reserve correspondent undertook various lines of service for its customer bank, and competition among reserve agents for these accounts amounted to a contest in the kind, amount, and quality of the services offered.

Banks carrying good balances could reasonably expect ready and ample accommodation by way of loans if they faced sudden and unexpected demands for cash, knowing that the reserve agent when called upon by wire would remit in as liberal and expeditious a manner as possible. The reserve agent, among other services, acted as financial adviser to its bank customers - answered their credit inquiries about names found in its credit files, bought and sold securities and commercial paper for them, acted as agent in loaning their money in the reserve city, made payments to and received payments from the United States Treasury and sub-treasury, handled their foreign exchange connections, and provided an agent at Washington, D. C, to care for inspection of securities, notes, plates, etc.

Probably the two most important services rendered by the reserve correspondent were the handling of collections, on which it sometimes absorbed the exchange charges, and the payment of interest on the net average balance. The local bank arranged to send to the reserve agent as many of its collection items on out-of-town parties as it found expedient, and the exchange charges on these items were a source of profit to the reserve agent. The reserve agent reciprocated by sending to the local bank customer all its collections on parties in that district, out of the proceeds of which the customer deducted exchange charges high enough to constitute a fair profit. Through its customer banks, the reserve banks established national connections and got into contact with innumerable areas, customers, and lines of business. The competition for customer bank balances led to paying interest of 2 per cent or more on the balances and to various agreements as to when transit and collection items should be credited and remittances debited and when interest should start. The payment of interest was the most powerful force in shifting the spare funds and the reserves of national and other banks to the banks of reserve and central reserve cities.