To insure prompt payment of its deposit liabilities each national bank is required to keep a reserve of lawful money which includes gold and silver coin, gold and silver certificates and United States notes. In the original act certain cities were designated as "reserve cities" and in those cities, prior to 1914, each national bank was required to keep a reserve equal to 25 per cent of its deposits. Banks in non-reserve cities, commonly known as "country banks" were required to keep only 15 per cent reserve. In three of the largest cities, New York, Chicago and St. Louis, called "central reserve cities,' banks were required to keep their 25 per cent reserve in their own vaults. Banks in the reserve cities, however, were allowed to keep one-half of their legal reserve in central reserve cities, and banks in the non-reserve cities might keep three-fifths of their reserves in reserve cities. The actual cash reserve required to be held in its own vaults by each bank was, therefore, only 6 per cent for country banks and 12 1/2 per cent for the reserve city banks. When a bank's reserve falls below the legal minimum it cannot increase its liabilities by making new loans or discounts, except by the purchase of sight bills of exchange, nor declare any dividend until the reserve is restored. Because banks in the reserve cities ordinarily have better facilities for loaning funds at all seasons, they have been willing to pay a low rate of interest on the reserve balances of country banks, though such balances are subject to withdrawal at any time. This resulted in a concentration of a large part of the reserves of the national banks in central reserve cities, especially in New York. But the New York banks loaned these "bankers' balances" as freely as individual deposits, keeping as a rule only the required reserve against them. In order to have quick control over these deposits New York banks habitually loaned a considerable part of them on call. The demand for such loans comes from stock brokers and others dealing in speculative securities. As a result of the piling up of reserves in New York and the lending of them for speculative purposes the reserve system as a whole was unstable and broke down repeatedly under financial stress. This was long recognized as one of the chief weaknesses of our banking and credit system.

The Federal Reserve Act of 1913 reduced the percentage of reserve which each class of national banks is required to keep and provided for the deposit of part of these reserves in the twelve Federal reserve banks where they will be more immediately available when needed by individual banks to meet sudden or unusual demands for money. Under the new law national, banks in central reserve cities are required to keep a reserve of 18 per cent of their demand deposits, of which 6 per cent must be kept in their own vaults, 7 per cent in a Federal reserve bank, and 5 per cent either at home or in the Federal reserve bank; reserve city banks must keep a reserve of 15 per cent - 5 per cent in their own vaults, 6 per cent in a Federal reserve bank, and 4 per cent in either; and country banks must keep 12 per cent - 4 per cent in their own vaults, 5 percent in a Federal reserve bank, and 3 per cent in either. All national banks are required to keep a reserve of 5 per cent of their time deposits distributed in the same proportion as prescribed for demand deposits.