While the national banking system has had the merit of issuing notes that were absolutely safe it has also had certain defects. Among these the most important have been the inelasticity of its note issue, the immobility of its reserves, and the lack of a discount market.

At certain seasons of the year the volume of business transacted is greater than at other seasons and correspondingly there is a greater need for currency at certain seasons than at other seasons. For example, in the fall, when the products of agriculture are being marketed, there is a withdrawal of money from the eastern cities to the agricultural regions of the West. This leaves a shortage of money in the East and creates a demand for the importation of gold from abroad. When the money returns from west to east the gold tends to flow out of the country again. Under a properly regulated banking system the amount of bank notes in circulation would be increased when there was a demand for more money, and when the demand had passed the amount of bank notes would contract again. In other words, the bank notes would be an elastic element in the currency system of the country. But under our national banking laws the issue of bank notes has not been elastic. Since the banks have had the right to issue notes up to the amount of the United States bonds deposited in the Treasury they have not been inclined to increase or decrease the amount of note issue except as they have found it convenient to buy or sell government bonds. The amount of bank notes outstanding has depended upon the market for government bonds rather than upon the needs of the country for currency.

In the second place, the national banks have had a defective system of reserves. Banks in certain cities designated as reserve cities were compelled to keep a reserve of 25 per cent of their deposits and banks in other cities were compelled to keep 15 per cent reserves against deposits. But the banks in the non-reserve cities might keep three-fifths of the fifteen per cent reserve on deposit with banks in the reserve cities. This left a reserve of only six per cent of the deposits actually in the vaults of the country banks. The banks in the reserve cities were compelled to keep at least one half of their 25 per cent reserve in their own vaults and were allowed to deposit the other half with banks in central reserve cities (New York, Chicago, and St. Louis). Banks in central reserve cities were compelled to keep their 25 per cent reserves in their own vaults. In times of financial crisis a failure of a bank in a central reserve city might involve banks in reserve and non-reserve cities because those banks had a considerable part of their reserves deposited with the failing bank. On the other hand, perfectly stable banks were not likely to come to the assistance of their weaker neighbor banks in times of distress for fear that they should weaken their own reserves and place themselves in danger. Each bank fought to save its own reserves. There was no thought of mobilizing the reserves of all banks into one mass so as to protect the deposits of all banks.

In the third place, there was no proper discount market. A bank might be in a flourishing condition, with its portfolio full of gilt-edged securities, but if a run were started on it, it would be impossible for it to sell its securities to obtain funds to meet its obligations. Under a good banking system it should be possible for a bank to hypothecate its first-class securities and secure funds with which to meet its obligations.