is commonly required. In six other states a lower reserve is required against time deposits than against demand deposits. This ranges from 4 per cent to 15 per cent for time deposits as against 15 per cent to 25 per cent for demand deposits. In sharp contrast the National Bank Act requires from 15 per cent to 25 per cent of all deposits. This example has been followed in but thirteen states.

Not only in regard to the amount of reserve, but also as to its form, do state and national laws differ. All states permit balances in other banks to be counted as a part of the reserve. The amount of redeposit so authorized varies from one-half to three-fourths. In seven states "the banks determine for themselves what part of their reserves shall be cash in bank and what part shall be in the form of bank balances." In four states bonds may be counted in the reserve. In the choice of depositaries the state banks are practically unrestricted. In but five states are distinctions made between the reserves required of ordinary banks and reserve agents.

The trust company legislation of the various states has been even more lenient than that pertaining to state commercial banks. This statement applies to the granting of loans, to the maintenance of specie reserves, and to full subscriptions to capital stock, though not, typically speaking, to the minimum capital requirement. Trust company legislation is in recent years, however, being brought into closer conformity with state banking legislation.

IV. THE REGULATION OF BANK NOTES

The regulation of bank-note issues is presented here as a distinct and separate phase of the problem of banking organization and control only because of its historical importance, bank-note regulation having given rise to more discussion and controversy than have all the other problems of banking control combined. The discussion that from the very beginning of our banking history has centered around the issue of notes is attributable in part to the fact that notes were long the primary form in which bank obligations were manifested; in part to the fact that they pass from hand to hand as currency without regard to the character of the persons passing them on, and form, in consequence, a part of the money supply of the country;

and in part to the fact that we look to bank notes to provide the necessary flexibility in the currency system as a whole.

There are three principal ends to be achieved when regulating bank-note issues: (1) they must at all times be maintained at a parity with standard money; (2) they must be amply secured so that there can be no question of their ultimate value; and (3) they must be made elastic, that is, responsive to the varying requirements of trade. During our earlier history the first two of these problems were the chief sources of controversy; but in recent years-with immediate parity and ultimate security accomplished facts-the discussion has centered around the problem of elasticity.

1. Maintaining the parity of bank notes. Since bank notes are designed to pass from hand to hand as currency it is necessary to insure at all times their parity with standard money, lest their issue lead to a depreciation of the currency and a general unsettling of prices. Various devices have been employed for insuring the parity of bank notes, the chief of which are (1) making them a legal tender in some very important connection, such as in the payment of taxes, and (2) providing for their easy, quick, and constant convertibility into standard money. The first of these devices has never by itself been found adequate, although it no doubt may have contributed somewhat to the success of the other methods.

In order to insure the continuous convertibility of bank notes into standard money it is necessary, first, that the issuing bank stand ready at all times to redeem its own notes when presented over its counter. But in order to keep the notes at par when they have wandered far from the issuing bank it has also been found necessary to make them redeemable at certain agencies in important banking centers with which banks everywhere are in close relations; or to make them redeemable at the Treasury of the United States. This latter method is employed in connection with our present national bank notes.

2. The security of bank notes. This aspect of the problem of bank-note regulation relates to the ultimate value of bank For other methods see pp. 98-100.

notes rather than to their immediate convertibility into specie. Several different methods have been employed to insure the holders of bank notes against ultimate loss, the three most common of which are as follows: (1) To rely upon the adequacy of the bank's assets to meet all note obligations in full. This is sometimes accompanied by a provision which gives the holders of notes a prior claim against the assets of the bank. (2) To require the bank to maintain a special security for a note issue, such as government bonds. This is the method employed by the national banking system of the United States. (3) To require the bank to set aside certain of its commercial assets as security for its note issues. This third method is specifically designed to promote elasticity in the bank-note system rather than to insure safety. It is believed, however, that both safety and elasticity can thus be attained.

It is unnecessary at this place to present the history of bank-note regulation, or to enter into a discussion of the various problems of regulation associated with the issue of bank notes, for they receive sufficient attention elsewhere in the text. The weaknesses of the system of bond-secured notes from the viewpoint of elasticity are discussed in the preceding chapter, while the advantages of asset currency in the same connection will be pointed out in the analysis of Federal Reserve notes in the chapter which follows.

QUESTIONS FOR DISCUSSION

1. Can you advance any sound arguments against the abolition of private banking?

2. Draw up a statement of the arguments against private banking. 3. What is meant by free banking? What are the arguments in favor of it?

4. What are the weaknesses in the system of general incorporation? 5. How would you determine how large a capital a particular bank, to be located in a particular community, should have? 6. Do you have any criticisms to offer of the capital requirements under the National Bank Act? under the state banking laws, as summarized on pages 559-60?

7. In what way does the accumulation of a surplus tend to increase the security of a bank's creditors?

8. Would you favor the abolition of the double liability requirement for bank shareholders? Would you favor the extension of this principle to non-banking corporations?

9. What is the objection to allowing a bank to commence business before the capital is fully paid in?

10. Write out a summary statement, giving the arguments for the various provisions governing the making of bank loans.

11. What do you think of the argument that it is dangerous for a commercial bank to make any considerable volume of loans on the security of real estate mortgages?

12. If you were asked to draw up a banking system for one of the Central American states, would you follow the American practice of requiring minimum specie reserves, or the European practice of permitting each bank to formulate its own reserve policy? 13. Look through one of the annual reports of the Comptroller of the

Currency in the library and draw up an outline statement of the significant data that it contains.

14. Which of the various ends to be achieved in the regulation of bank notes do you regard as most important? which the most difficult of attaining?

REFERENCES FOR FURTHER READING

Agger, Eugene E.: Organized Banking, chap. xii.

Dunbar, Charles F.: Chapters in the History and Theory of Banking, 3d edition, enlarged by O. M. W. Sprague, chap. xi.

Moulton, Harold G.: Principles of Money and Banking, Part II, chap. vi.

Scott, William A.: Money and Banking, chaps. ix and x.

Willis, H. Parker: American Banking, chaps. xiii and xiv.

CHAPTER XXV

THE FEDERAL RESERVE SYSTEM

The adoption of the Federal Reserve Act on December 23, 1913, marks the beginning of a new era in American banking development. For the first seventy years of our national history banking as a business was conducted almost entirely under the regulation of the various states, with a resulting heterogeneity of banking laws and banking practice. The national banking system, dating from the Civil War, gave us, as we have seen, a uniform and a safe bank-note currency— though not a flexible one-and in general marked a real advance in the development of banking organization. With the passage of the Federal Reserve Act, fifty years later, we have entered upon a third stage in our banking evolution, a stage that may be characterized as one in which a long step has been taken toward centralization in the control of banking, one in which the differences between state and national banking are being slowly but surely eliminated, and one under which the vast economic power that inevitably resides in the financial system can be made to subserve as never before the larger interests of commerce and industry.

I. THE HISTORY OF BANKING REFORM

The shortcomings of the national banking system, as it existed before 1914, were revealed to close students of the question in almost every period of seasonal or cyclical strain upon the money markets. But reform of our banking laws was slow in developing, in part because other financial issues took precedence and in part because the defects which had been disclosed appeared in the main to be such as required amendment merely, rather than thoroughgoing reorganization. The generation following the Civil War was one in which dis