Present Reserves

Present Reserves

Strong, Benjamin, 1872-1928

WWP18415

[1913]

Benjamin Strong Jr. reports on present and proposed reserves.

Benjamin Strong Jr. Papers, New York Federal Reserve Bank

English

Present Reserves. Reserves Proposed.
In vault ... .$219,110,586 $182,592,156
With Reserve Agents .....$328,665,862 $182,592,156
In Local Association $182,592,156

Reserve Cities
In Vault ..... $246,782,394 $197,425,915
With Central Reserve Agents.$246,782,394 $ 98,712,957
In Local Association .... $ 98,712,957
(After three years;
(In Vault ................................. $ 98,712,957
(
(In Local Association .. $197,425,915

Central Reserve Cities.
In Vault ..................................$398,230,116 $159,292,046
In Local Association ..... $159,292,046


The above figures are compiled on the basis of the Comptroller‘s report on National Banks on April 4, 1913. The “present reserve” represents the requirement and not the actual amount held by the banks, in order to make the comparison a proper one. The difference, however, is really very slight between the actual and required reserves.
The cash required in all banks April 4 was $864,123,098, whereas under the proposed plan it would be $539,310,117, or $324,812,981 less than is required at present. The local associations, however, would have deposits of $539,310,117, against which they would have to maintain a reserve that would vary depending upon the amount of currency they had outstanding, but figuring that such reserve would amount to 50%, or $269,655,058, the total cash reserve would be $808,965,175, or $55,157,923 less than at present. The reserves of the present reserve cities and central reserve cities would, however, be considerably less even under present percentages of figuring, as they would lose deposits to local associations amounting immediately to $440,597,159, and in three years based on present figures to $539,310,116. It is impossible to state definitely what reduction in the cash reserve this would mean, as a portion of the loss in deposits would be met by the reserve agents, who only hold 12 ½% in cash, and the balance by central reserve agents, which must hold 25% in cash. Figuring on an average of 20%, the amount would be for the present $88,119,431, and in three years $107,862,023. Now going back to the cash released, or $55,157,923, we find that $32,961,508 more could be released at present and still have the banks’ present portion of reserve and $19,742,592 more at the end of three years. Inflation, based on present deposits, could only take place at the end of three years on cash reserve of $163,019,946, which, figuring the average reserve required in all classes of banks at 8%, would allow an extension of loans amounting to $2,037,749,325. The reduction of deposits in the banks would partially be due to elimination of the duplication of deposits, where reserve cities deposited funds received by them from country banks in central reserve cities.
It would not seem as though the reserves of state banks would be affected in any particular, except as new state laws might require or allow. For instance, if a state should authorize its banks to count as their reserve money in local associations, it might have an effect on the deposits of national banks, or if the banks were prohibited from counting as reserve notes of the reserve associations, it would contract the lawful money in circulation by the amount of national bank notes at present held by state banks as a part of their reserve. In some states it might require a special act of Legislature in order to make it possible for the state banks to count reserve association notes in their reserve, but in most states I think there is nothing to prevent the state banks from counting such notes as reserve, provided no exception is taken to their action by the state bank examiner, and even if the examiner did object, he would not be able to enforce his opinion. Regarding the effect upon the deposits of central reserve cities, the proposition is somewhat problematical, as it is impossible to determine what proportion of the 4% the country banks would have to transfer from reserve agents to local associations would consist of balances at present with reserve agents and with those in central reserve agents. As New York, Chicago and St. Louis exchange would probably still be in demand, it might be fair to figure that say 2% would be taken from each. In preparing the figures I will take this basis, although there is a possibility that the reserve associations might be handled in such manner as to lessen the demand for exchange on central reserve cities (this would probably not be true, however, even if some Giro-Conto system were established).The reserve required to be held by country banks with reserve agents April 4, 1913 amounted to $328,665,882. Of this amount under the proposed plan $146,073,725, representing 4% of the net deposits of $3,651,843,139 would have to be transferred to local associations. Figuring that half of this amount is taken out of central reserve cities, it would reduce their deposits $73,036,862. On the same date the reserve cities had deposits of $1,974,259,154, requiring a reserve of $493,564,788, of which half, or $246,782,394, could be carried with central reserve cities. Under the proposed plan 5% of the deposits, or $98,712,957, may be carried with central reserve agents instead of $246,782,394, which would represent a reduction in the deposits in central reserve agents of $148,069,437 t.hat are at present maintained by banks in reserve cities. To this $148,069,437 must be added the $73,036,862 that would be withdrawn by country banks, making a total of $221,106,299 in bank deposits, which would be withdrawn from reserve cities immediately when the law went into operation, and a further reduction of $98,712,957 in three years, amounting all together to $319,819,256.The total national banking deposits of the central reserve cities April 4, 1913 amounted to $563,609,971, and they would be reduced at the end of three years to $243,790,715, with a possible further reduction of $73,036,862 immediately should the country banks withdraw the whole of the 4% that they must transfer from reserve agents to local associations.
The cash reserve required by central reserve banks April 4, 1913 was $398,230,116. Accepting the reduction in bank deposits in central reserve cities as being $243,790,715, their total net deposits would be reduced from $1,592,920,465 to $1,349,129,750. Under the new plan 10% of this amount, or $134,912,975, would have to be held in the banks’ vaults instead of $398,230,116, or a reduction in cash in the central reserve cities of $263,317,141. Of this amount suppose that $243,790,715 was used to pay off the bank deposits that would have to be given up. This would leave $19,526,426 in cash which could be paid out by the central reserve banks (and still maintain their cash reserve) toward the $134,912,975 which the central reserve banks would have to maintain with the local associations. This would leave $115,386,549 that would have to be withdrawn by the central reserve banks from other channels in order to complete their reserve.

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