1. Reserve In National Banks

One other topic remains for consideration. National banks must keep a reserve in government notes proportioned to their deposits. For this purpose the banks are divided into three classes. Those in the central reserve cities must keep twenty-five per cent; those in the reserve cities also twenty-five per cent, but one half of this amount may be kept with a national bank in a central reserve city; and all other banks must keep fifteen per cent, nine per cent of which may be kept with a bank in a reserve or central reserve city. The central reserve cities are three, New York, Chicago, and St. Louis. The reserve cities have multiplied until their present number is twenty-eight.1

2. Against What Deposits Must The Reserve Be Held?

They have been thus classified: (1) individual deposits; (2) United States deposits consisting chiefly of the collections made by internal revenue collectors; (3) deposits of United States disbursing officers, chiefly paymasters; (4) unpaid dividends due shareholders; and lastly (5) balances due to and from banks and bankers.

3. Determining Balances

There is one peculiarity in determining these balances. if the aggregate amount due to other banks, whether state or national, and bankers is greater than the amount due from them, a reserve must be held against the balance as in the case of other deposits; but if the balance due from them is equal to or greater than the amount due to them, then the item is excluded from the calculation, and the amount of reserve must be determined as though there were no balances whatever due to or from any bank or banker.

1 The reserve cities are: Boston, Albany, Brooklyn, Philadelphia, Pittsburg, Baltimore, Washington, Savannah, New Orleans, Louisville, Houston, Cincinnati, Cleveland, Columbus, Indianapolis, Detroit, Milwaukee, Des Moines, St, Paul, Minneapolis, KansasCity, St. Joseph, Lincoln, Omaha, Denver, San Francisco, Los Angles, Portland Oregon).

4. Offsets

Against the deposits held by a bank various items or resources may be offset before determining the final amount against which a reserve must be held. These items are (1) exchanges that are to be paid through the clearing house; (2) checks on other banks in the same place which do not belong to the clearing house; (3) bills of other national banks, but not those of its own issue; and (4) lastly, after the reserve required is ascertained there may be a reduction of the five per cent redemption fund held by the United States Treasurer to redeem its circulation, consisting of the notes of the government.

5. Computation By A Central Reserve Bank

Having now ascertained the different items included in the term deposits and the deductions that may be made, it is an easy process for a bank in a central reserve city to determine the amount against which it must keep a reserve of twenty-five per cent.

To illustrate more clearly the mode of computing the reserve of a bank the following example1 is given: -

l This is taken from George M. Coffin's excellent Hand-book for National Dank Officers, page II.