Again, objection might be raised against the system on the ground that the fixation by law of a minimum per cent reserve against deposits is very questionable policy. The other governments of the world have left the question of reserve to business expediency. In the older countries with a strong central bank closely affiliated with the government and conscious of its public responsibilities, the plan of voluntary reserves has worked admirably. The tendency in America has been to keep the least possible reserve; as shown above, the banks of New York City in a recent decade barely kept the required minimum. Before the panic of 1907 the trust companies of New York, which were not then directed by law, kept reserves of only 2 per cent, although they were increasingly invading the field of commercial banking. Banks operating under state laws that required only very low reserves uniformly kept only the reserves required. Conservatism and a high sense of public responsibility have not at all times and places characterized our banking class; the force of law may have had the virtue of teaching what the public regards as proper security. The danger of a legal minimum reserve requirement, however, is that the bankers may misinterpret the law and construe it as a command to keep merely reserves to the amount stipulated and no more. As a result the minimum reserve required tends to become the maximum kept, and this has been the experience in the United States.

The reserve is largely maintained in order to instil public confidence in the bank's ability and willingness to pay. If the bank maintains only the minimum required, the slightest run on the bank sends its reserves below the legal limit, and the bank cannot then make use of the reserve for the purpose for which it is kept. Inability to pay out the reserve, by turning suspicion into positive distrust, stimulates the run and often forces a solvent bank with a good supply of gold to suspend. It is like arming a soldier for defense but telling him not to shoot. If a legal minimum reserve is to be required at all, the law should be so drawn as to make this reserve elastic, permitting its use under penalties which would be prohibitive except temporarily in times of emergency.