When all means of procuring elsewhere the additional funds needed in time of monetary stringency have failed or been exhausted, there still remains the alternative of manufacturing more currency that can serve as the basis of credit expansion. But under our national banking system our currency always proved inelastic; it could not readily be increased in quantity to meet the requirements of the situation in time of stringency, nor could the quantity be easily reduced during periods of monetary ease. This inelasticity, however, was due not so much to the system of independent banking as to the nature of the security required by law for the notes issued by the national banks. Through the use of clearing-house loan certificates and the equalization of reserves the banks have at times been able to save the financial system from breaking under the strain, but generally the inability of a voluntary association to control the policy of all its members has resulted in disaster for all. Government regulation and government provision for an elastic currency appear, therefore, to be a necessity. A. Within a Given City (1) LOANING RELATIONS 42. RESERVES OF CLEARING-HOUSE BANKS AND TRUST COMPANIES IN NEW YORK' 43. NATIONAL BANKS AND TRUST COMPANIES1 By O. M. W. SPRAGUE In times of moderate strain the clearing-house banks of New York were often enabled by means of the trust companies to make a better showing in the weekly bank statements than would otherwise have been the case. As the business of the trust companies was chiefly local they were not subject to seasonal withdrawals of cash, and their lending power was, therefore, more nearly the same throughout the year. An increase in rates for loans in New York was usually followed by a shifting of loans from banks to trust companies. By this means the deposit liabilities of the clearing-house banks were reduced, thus enabling them to preserve the cherished 25 per cent reserve ratio. The resort to this device was, of course, greatly simplified through the close affiliations between some of the large banks and trust companies, and it was so much in evidence during the years before the crisis of 1907 that the surplus reserve became quite as much an object of mirth as of confidence. 44. INTERDEPENDENCE OF BANK RESERVES BY VICTOR MORAWETZ The character and sufficiency of bank reserves must be considered with regard to the banking situation as a whole as well as with regard to the affairs of each separate bank. Thus a deposit claim of one bank against another bank-that is to say, its right to call upon such other bank for the payment on demand of a sum of money-may be treated as a reserve, if we leave out of consideration the position of the banks collectively and the general banking situation. But obviously the liability of a bank to pay money to another bank would not increase the collective ability of all the banks to pay all their depositors and would not in the least strengthen the general financial situation. When a particular bank strengthens its own reserve by drawing upon its deposit with another bank, it weakens to the same extent the reserve of the bank it draws. upon which Adapted from Crises under the National Banking System, pp. 227-28. (National Monetary Commission, 1910.) 2 Adapted from The Banking and Currency Problem in the United States, pp. 16-19. (North American Review Publishing Co., 1909.) Similarly, bank-notes may be treated as a reserve if the position of the bank holding such notes be considered without regard to the general banking situation; but, having regard to the situation of all the banks, it is clear that such notes are not good as a reserve. A bank note is merely a promissory note payable in money on demand. Bank "A" holding notes of bank "B" may consider such notes as good as money so long as bank "B" is solvent and pays its obligations on demand; but it is obvious that when bank "A" obtains money from bank "B" by requiring it to redeem its notes, the reserves of bank "B" will be diminished exactly as much as the reserves of bank "A" are increased. That, having regard to the entire banking situation, bank notes are not a good reserve becomes apparent upon considering the case of several banks exchanging their notes, and each bank calling upon the others to pay their notes in lawful money. As long as financial conditions are normal, call loans may be regarded as a good reserve, because a bank can obtain cash promptly by calling such loans; but call loans do not strengthen the general banking situation, and, therefore, when there is a severe money stringency, they are not good as a reserve. When a bank calls a loan, the borrower either must borrow the same sum from some other bank, although required to pay a very high rate of interest, or he must obtain the required sum by selling property, and in that event the purchaser usually must draw the money from the banks. Therefore when a bank strengthens its reserve by calling a loan, the practical effect is to draw the money from other banks and pro tanto to weaken their reserves. For similar reasons, as long as financial conditions generally are not strained, bonds or other securities that have a ready market may serve as a reserve, because by selling such bonds or securities a bank can obtain money; but reserves of that character do not strengthen the general credit situation and are not available when most needed by the banks that hold them. When a bank sells securities in order to obtain lawful money to pay its depositors, the purchaser usually must draw the purchase price from the banks. The selling bank thus would obtain lawful money by drawing indirectly from the reserves of other banks. Therefore when there is a general money stringency, bonds or other salable securities are not good reserves. During the recent panic many of the banks and trust companies, including some of those which failed, owned large amounts of high-class securities, but this did not help them or relieve the general situation, as the combined lawful money reserves of the banks and trust companies were inadequate. Deposits by banks in other banks, bank notes, call loans, and bonds or other securities are not, properly speaking, bank reserves at all. They are only the means of obtaining reserve money for particular banks by drawing this money from the reserves of other banks. In considering the general financial situation, deposits of banks, bank notes, call loans, and securities held by the banks should be disregarded. For the ultimate payment of bank-deposit liabilities the only true reserve is legal-tender money. 45. EARLY SETTLEMENT OF BALANCES BETWEEN BANKS1 BY JAMES G. CANNON Prior to the establishment of the New York Clearing-House in 1853 the method of settling balances between banks was a very costly and cumbersome process. In the daily course of business each bank received checks and other items on each of the other banks, which had to be presented for collection. All such items on hand were assorted and listed on separate slips at the close of the day, and items coming in through the mail on the following morning were added at that time. To make the daily exchanges each bank sent a porter with a book of entry, or passbook, together with the items to be exchanged. The receiving teller of the first bank visited entered the exchanges brought by the porter on the credit side of his book and the return exchanges on the debit side, who then hurried away to deliver and receive in like manner at the other banks. It often happened that five or six porters would meet at the same bank, thereby retarding one another's progress and causing much delay. Considerable time was consumed in making the circuit. Hence, the entry of the return items in the books of the several banks was delayed until the afternoon, at an hour when the other work of the bank was becoming urgent. A daily settlement of the balances was not attempted by the banks, owing to the time it would have required, but they informally agreed upon a weekly adjustment, the same to take place after the exchanges Adapted from Clearing-Houses, pp. 127-31. (National Monetary Commission, 1910.) |