In Chapter VI it was stated that one of the three essential objectives in protecting bank notes is to provide for their instant convertibility upon demand by the holder and thus maintain their parity. The same applies to demand deposits, if checks and sight drafts are to be kept at par.
The problem is to keep on hand or within reach sufficient cash to meet not only ordinary but extraordinary demands. The sum kept for meeting the ordinary demand is spoken of as "till money," or "cash," and that for meeting the extraordinary is called "reserve money." "Reserve" is sometimes used to cover both sums. The till money may be in any form; the reserve should consist only of legal tender or standard money. The amounts that must be kept for these purposes are determined by experience and the conservatism of the banker. A bank with relatively few depositors, or with a few exceptionally large depositors, must be cautious and maintain larger reserves than banks with a large body of relatively equal depositors. A bank with a large body of foreign-born or ignorant and excitable depositors must fortify itself against precipitate, unreasoned runs; a bank in a large city needs higher reserves than banks in smaller centers or rural districts. A banker who is conservative, preferring safety to great earnings, and who feels a high sense of responsibility to the community, will keep higher reserves than one not so scrupulous. A bank which has good business relations with a large central bank, or which stands well with the other banks of the city, and which can, therefore, in emergency borrow or rediscount, may safely carry lower reserves. The reserves against demand liabilities need to be higher than against time liabilities, since advance notice may be required in the case of time liabilities, and the maturities being known, provision against their liquidation can be made. Finally a bank with a good secondary reserve which can be liquidated in emergency need carry only small reserves.
The proper reserve has to be determined, therefore, by each bank for itself in the light of these and other controlling conditions. The penalty of expansion on too slender reserves is to incur adverse clearing house balances; the percentage of reserve, as among the banks of a system, cannot vary to a great extent with impunity. The state may determine upon some proportional reserve which, in the light of average experience to date, seems to provide a normal degree of safety, and prescribe this as a minimum, and close or penalize banks which continually trespass on this minimum. This has been the practice in the United States with respect to both notes and deposits. The banks are expected to keep - and usually do keep - larger reserves than this minimum.