The necessity for shipments of cash or currency is, under such a system, obviously reduced to a minimum. Should the banks of a given community be, for a prolonged period, debtors in the domestic exchanges, and should they be unable through loans or advances to strengthen their balances with the central authority, nothing would remain for them but to ship cash withdrawn in some manner from local circulation. In practice, however, in countries which have centralized reserves, such a necessity hardly ever arises. On the other hand, the banks of a given community may be substantial creditors in the exchanges and may choose for local reasons to draw down a part of their balances in cash or currency. But in any event the first result of the clearings is simply a shifting of reserve balances, and shipments of currency either to or from the reserve center must be regarded as independent phenomena.

Two general systems of reserves may be considered

Centralized reserves

Adjustment of balances is simple here

Cash shipments only occasional

This also suggests another point. Irrespective of clearings currency shipments are not between local communities themselves. They are between the local communities and the reserve center, and all of a given community's dealings with the outside world, in so far as they are handled through the banking system, are reflected in the shifting of its balances on the books of such reserve center.

A system of decentralized reserves is one where the banking reserves are kept mainly in individual banks. Here a line should, perhaps, be drawn between a system made up of relatively few banks having many branches, as in Canada, and a system of many independent local banks as in the United States.

Under the branch system settlement of balances in intercommunity clearings approximates that under centralized reserves. With relatively few banks and many scattered branches a large number of intercommunity transfers may be made through entries on the books of the parent bank. Here, as under a centralized system, the adjustment is made between communities simply by a process of bookkeeping. But it is obvious that in so far as different banks, rather than branches of the same bank, are involved, a more comprehensive system of clearings and settlement is necessary.

Under a system of local independent banks as in the United States, three broad possibilities of settlement in intercommunity clearings may be noted.

1. Where banks in different centers reciprocally carry balances, or where one center holds balances for the other.

2. Where banks in different communities carry balances in a common third center.

3. Where banks in different centers carry balances in independent centers whose banks in turn carry balances in a common center.

Decentralized reserves

There are two general types to consider here

Three broad possibilities under a system of numerous, local, independent banks

Under the system of reciprocal balances the adjustment of reciprocal claims simply reacts on the relation of the balances themselves. Each bank charges the account of or is remitted to by the other for all items chargeable against the other that appear in the course of the day's business.

Where one center acts as the holder of reserve balances for another, debits and credits are simply brought together on the books of the reserve center. The credit items are entered as they are submitted, while the debit items are charged or are specifically remitted for after their validity has been determined. The net result is a readjustment of the balance on the books of the reserve center.

Currency will be shipped between centers carrying reciprocal balances when either center wishes to enlarge or to diminish its balance in the other center and when no cheaper expedient presents itself. Other expedients that might be employed are loans raised directly in the center to which otherwise the currency would move, or credits obtained in such center through the instrumentality of other communities.

Currency will move in the case of one center holding balances for another, under similar conditions. It will move to the reserve-holding center when the debits of the other community exceed its credits for a more or less extended period, and when loans or credit advances cannot be directly or indirectly arranged in the reserve center. It will also tend to move to the reserve-holding center when the banks in the smaller center wish to increase their balances in the larger center and when funds payable in the reserve-holding center cannot be more economically obtained in other ways. Currency will move from the larger center to the smaller community when conditions are exactly opposite to those just referred to.

Reciprocal balances

One center may hold balances for another

Currency shipments in the case of mutual balances

As examples of the first of the two cases thus far discussed reference may be made to the relations between the banks of New York and Chicago. In these two important centers the larger banks maintain reciprocal balances. Reference may be made next to the larger cities in the United States and to all the little towns surrounding them, as examples of the second case, namely, that of the holding by one center of the reserve balances for other centers. Most of the trade of these smaller towns is with the neighboring larger centers, and even where that is not the case, financing practically all the "foreign" or out-of-town business through the larger center is for the banks in the smaller communities the simpler and the more economical system.

The second general scheme of settlement under a system of local independent banks was described as that where two centers carry balances in a third common center. New York, for example, functions as an intermediary between most of the larger towns of the United States whose mutual business dealings are not sufficiently extensive to warrant direct banking connections. In this case while the individual items in the exchanges may be sent directly to the communities against which they are chargeable, or indirectly through the common reserve center, remittance is made by means of a draft on the reserve center. The net result of the operations is thus simply a shifting, on the books of the banks in the reserve center, of the balances carried there by the communities concerned. An Albany bank, for example, has a check that was drawn on a bank in Trenton. This check would in all probability be sent by the Albany bank to its New York correspondent. The New York bank will in turn send it to its Trenton correspondent if it has such, or to some bank in Trenton which will undertake collections of this character. The Trenton bank will then put the check through the local clearings or will present it for payment at the counter of the bank against which it is drawn, and when the check is thus paid, the Trenton bank, acting as the collecting agent, will remit by drawing a draft on its own correspondent in New York. In other words the claim that Albany has against Trenton as embodied in the check, is settled by means of a transfer to the credit of Albany of a part of Trenton's New York balance. Claims that Trenton might hold against Albany would be settled in a similar manner, but the movement would be in the opposite direction. In both cases the interesting and important point is the shifting of balances in New York. Credits offset debits and net differences result in net balance readjustments.