It is very questionable whether it is desirable to establish a minimum reserve by law, though it does exert a restraining influence on a few reckless bankers who might otherwise injure the whole financial fabric. On the other hand, the reservation of a minimum amount renders the reserves impotent at the very time they should, and otherwise would, perform the service for which they are kept, namely, that of providing for convertibility in emergencies. Such a minimum gives the banker a weapon of self-defense, but ties his hands. The psychological effect of the known large reserve is undoubtedly good, allaying the depositor's fears as to the bank's ability to pay on demand; but if the depositor also realized that this reserve could not be actually used when required, his faith would be less strong. A further disadvantage of the fixed minimum reserve is that it undoubtedly tends to become the maximum kept by the banks.
The banker steers his course between two opposing tendencies. A cash reserve which bears a high ratio to the demand liabilities promotes safety and high confidence in the bank; but the bank makes its profits on extensions of credit by way of notes, deposits, and so forth, and the lower the ratio of reserve to these liabilities the greater the earnings of the bank. The bank is a corporation whose raison d'etre is profits to its stockholders. The officers of the bank are, therefore, moved to build on the cash holdings of the bank as large a superstructure of credit as safety warrants; reckless extensions of loans bring dividends but invite disaster. In these respects a bank differs in no essential from any business institution; a working balance of cash is necessary to each; the important difference is one of degree. Demand liabilities, in contradistinction to time liabilities, constitute practically the whole credit of a bank, whereas they constitute only a small proportion of the credit of other businesses. Consequently the greater importance of bank reserves is manifest.