made in their favor through collections and deposits of checks and drafts may be in their favor or against them. In the former case their balances with their correspondents will increase and in the latter case decrease. A succession of favorable balances might result in large accumulations and a succession of unfavorable balances in the overdrawing of their accounts. The existence of such balances renders possible the movement of money from one place to another, since the creditor banks may demand from the debtor banks payment in cash. Whether or not they will do so depends upon their ability profitably to use at home more cash than they already have, and this depends upon the relative local and outside demand for loans and hand-to-hand money. When banks are loaning heavily to local customers, their deposits increase and more cash is needed in the reserves, and when there is an increased demand for hand-to-hand money, a relatively larger number of checks are presented for encashment, and they are obliged to increase the percentage of reserves to deposits unless they are able to meet this demand by increased issues of notes, a resource not open to the banks of the United States under existing conditions. If the home demand for loans and for hand-tohand money does not justify the banks in calling for shipments of currency from their correspondents, they may loan surplus funds in the cities in which their correspondents are located, or in other cities, or leave them on deposit with correspondents at such a rate of interest as may be agreed upon. In this case these funds will be loaned by the correspondents instead of by the local banks, and the rate of interest paid by them will be sufficiently below the local rate to guarantee a fair profit on the transaction. In case the home demand for loans, or cash, or both, exceeds the funds banks have at hand or on deposit with their correspondents, they may arrange with the latter for overdrawing their accounts, either by drawing drafts upon them without sending exchange or cash sufficient to pay them, or by ordering shipments of currency to them in case the need is for hand-to-hand money rather than credit. Correspondents will grant such accommodations only on condition of the payment of a rate of interest on adverse balances equal to or in excess of the local rate plus the expenses of the transaction.

55. THE CONCENTRATION OF MONEY IN GREAT
FINANCIAL CENTERS

It has been the theory of our national banking system to permit a depositing of reserves by the banks of smaller cities in the banks of

larger cities. For instance, country banks have been allowed to keep three-fifths of their required reserve in correspondent banks in the financial centers. The practice is quite general for these banks to loan this reserve at a small rate of interest (2 per cent) to the larger city banks, particularly in New York, where they are used in the making of call loans to stock-exchange speculators.

In addition to loaning their legal reserves the outlying banks also loan additional funds to New York and other city banks during periods of slack business in the country. Otherwise idle funds are thereby given temporary employment while remaining subject to call for more remunerative investment as soon as occasion offers. Sometimes instead of redepositing these funds in banks in the money centers they are simply sent to brokers, who offer them as loans at the best rates obtainable.

56. EXAMPLES OF RAPID CONCENTRATION OF FUNDS1 BY FRED M. TAYLOR

The experience of the country as a whole with reference to currency movements is duplicated on a small scale between every trading center and the territory immediately dependent upon it. For example, some years ago in a certain Michigan village which had a factory with a pay roll of $2,000 per week, it proved necessary for the local bank to bring out the $2,000 in cash from Detroit practically every week in the year. That is, the $2,000, having been paid to the workmen, instead of remaining in the village ready for use the next week, before the time was up found its way into Detroit, from which it had to be taken back by the banker.

Another rather striking illustration of this principle comes from the copper country of Michigan. There the banks are every month called upon by a great mining company to furnish many thousands of dollars in fifty-dollar bills, and these bills have to be shipped in from Chicago or New York, not once, but every time. This seems very strange. One would suppose that those bills which were shipped in and used in January would drift back to the banks and be ready for a second job in February. But not so; when February comes around the bills have all disappeared, and the operation of shipping in has to be repeated. And this goes on indefinitely

Adapted from Some Chapters on Money, pp. 139-40. (Copyright by the author, 1906.)

57. NEW YORK, THE GREAT FINANCIAL CENTER1

BY O. M. W. SPRAGUE

The significance of the New York money market in our banking system is not fully recognized. It is indeed generally understood that the practice of depositing reserves with agents in the money centers places a severe strain upon them in emergencies, and it is well known that the New York banks have acquired a large share of such deposits. The enormous responsibilities resting upon the New York banks on this account may be seen from the following statistics: On September 1, 1909, the New York banks held more than 43 per cent of the net bankers' deposits of the country. Compared with the banks of Chicago and St. Louis their obligations to bankers were almost three times as great.

Large New York balances are necessary because New York is the clearing-house of the country. In this connection certain statistics gathered by the Comptroller of the Currency nearly twenty years ago have great significance. From information provided by 3,329 of the 3,438 national banks it was found that in 1890 all but three drew drafts upon New York, and that the total amount of such drafts was 61.31 per cent of all the drafts drawn upon all the banks of the country. In the case of the Chicago banks the amount drawn was but 9.82 per cent of the total. The Chicago banks drew upon New York for $222,000,000 and were drawn upon in return for but $82,000. These figures show very clearly how indispensable is the maintenance of payments by the New York banks if the dislocation of the domestic exchanges is to be avoided.

58. PAYING INTEREST ON DEPOSITS AND BANK

COMPETITION2

BY GEORGE S. COE

The payment of interest on deposits of money payable on demand is open to the gravest objections. This subject has upon several occasions in years past been under consideration, and its total abolition has been almost unanimously agreed to among our banks by written. contract. Yet by the refusal of one or more members it has failed to become a binding obligation. Like some other great reforms, this Adapted from "Proposals for Strengthening the National Banking System," Quarterly Journal of Economics, XXIV (1909-10), 219-20.

I

2

Adapted from an address before the New York Clearing-House Association. June 4, 1884 (Bankers' Magazine, New York, LVI [1884), pp. 44–51).

one does not admit of partial application or of compromise. Any attempt to make exceptions to the prohibition among partners mutually dependent can only result in entirely releasing them all from any obligation respecting it. Yet every banker will freely admit that the purchase of deposits payable on demand operates, in some degree, as an absolution of the obligation to be always in condition to meet the contract. Both the giver and receiver of interest on such deposits, by the nature of the business, substantially, though not expressly, agree to such use of the money as may prevent its immediate return.

What is the nature of bank deposits? Every responsible person in regulating his own affairs must withhold from permanent investment and keep in hand enough ready money for his current wants. This is his reserve. When such sums, for greater safety, are placed in charge of another person, they do not lose their essential character; and when they become further aggregated and pass into the possession of a bank or banker, they are still subject to the same immediate wants of every original owner for the very purpose for which he set them aside. And when these rivulets of capital become streams, and streams gather into rivers and flow toward the ocean until they reach this city, where they come into financial relations with other men in other continents, the parties who here take them in charge assume new and accumulated responsibilities. They are subject not only to the necessities of the people at home but also to the world-wide influences of commerce.

Is it not evident that when these reserves are attracted by banks and bankers who pay interest for them they immediately lose their peculiar character and become, so far, at once changed from reserves into investments, and that their original purpose is greatly reversed? The people's ready cash, by the very condition of receiving interest for it, necessarily passes through the banker into fixed forms never intended. Reserve and investment! Idleness and work! They are adverse and irreconcilable conditions. It is true that in the hands of sound commercial banks some of these deposit funds may be legitimately used for the best interests of society, in the negotiation of business notes representing articles of human want and subsistence, passing from production into consumption. This is using the fund by promoting the very object for which each person originally provided it. But such, we all know, is not the tendency nor the operation of the practice now in question. Money payable on demand with interest is chiefly loaned here upon fixed property intended for permanent

investment and upon bonds, stocks, and other obligations made for the construction of public enterprises and works of established purpose, whose large expenditures are not again resolvable into money. They are in their nature fixed, and they demand, not their ready cash reserve, but the permanent savings of the people to construct them. So that temporary loans of reserved capital upon such securities are certain to be called in when they are hardest to pay, because the ready-money reserves so injudiciously absorbed by them are called back by their owners in apprehension or for the supply of their own needs.

Deposits so unnaturally attracted are necessarily capricious and transitory. They fly away at the first whisper of danger, to the detriment of the many who have touched them. Those banks which so purchase them are objects of special dread to their colleagues in business, while at the same time they are continually held up as patterns of enterprise and as models for imitation. Differing so widely from their associates in principle and in practice, the two cannot work harmoniously together, nor equally and honorably share the burdens of a national financial system whose stability requires the New York banks voluntarily to stand firmly and compactly together as one united body.

Experience among ourselves has again and again proved that the interest-paying banks are the first to become embarrassed by any kind of financial disturbance, even if they themselves are not the means of producing it, and that they are then almost alone in being compelled to seek protection from the loan committee by a pledge of their securities.

Will a few members of this association, on the one hand, longer continue a practice that subjects them to this humiliation? And is it just, on the other, for a large majority to tacitly submit to having their business thus drawn away and the community periodically disturbed by associates whom, in the hour of peril, they are compelled for their own protection to support?

59. REDISCOUNTING BY NATIONAL BANKS'

BY LAWRENCE O. MURRAY

While the banks are assumed to have sufficient capital, surplus, profits, and deposits to take care of the business of the community in Adapted from a letter quoted in an unpublished thesis by Joseph J. Klein, entitled The Development of Mercantile Instruments of Credit in the United States (1911).