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18?
Lecture at
.of Banking, University of Wisconsin
Madison, Wisconsin
THE FUNCTION OF BANK RESERVES
The term "bank reserves" is one that may have several meanings. It
ay be used to refer to the total amount of reserves which qualify for
meeting legal requirements of commercial banks or it may be used to include quick assets that banks hold as secondary reserves. Both commercial banks and the Federal Reserve Banks hold reserves but these are quite
different in form. In our discussion today, when I refer to bank reserves
shall in general be referring to the reserves that member banks hold on
de
posit with the Federal Reserve Banks, of which a part are legally required reserves and a part may be excess reserves. Nonmember bank reserves take several forms in accordance with various state laws, but the
ulk of them are held in vault cash and on deposit with correspondent
)Q
nks. Reserves of the federal Reserve Banks consist of gold certificates
held in their vaults.
m
For more than a century, it has been an accepted feature of the nation's banking system that commercial banks should be required to hold a
certain fraction of their deposit or note liabilities in reserves. As
°ur monetary and banking institutions have developed, however, our conception of the primary function of legal reserves of banks has undergone
Sl
gnificant change. Originally the principal purpose of legally required
^serves was to assure the ability of individual banks to meet liabilities
demand during a period of strain. That is to say, it was to provide
° r the convertibility of bank notes and bank deposits into cash. With
the establishment of the Federal Reserve System, the role of bank required
reserves was greatly modified, and today they serve mainly to set a limit
° n ^ e total volume of bank, credit and the money supply.
Reserve requirements against circulating bank notes became a part of
American banking law a century ago, and requirements against bank deposits
were introduced by the National Bank Act in 1863 and by two States even
earlier. At first each bank's reserves comprised the specie in its own
faults. Later these reserves came to include funds which a bank might
have on deposit with another bank in a financial center.
In the course of time it became evident that reserves alone were not
adequate protection to banks and their depositors. The reserves which
. a bank was legally required to maintain were not reserves which the bank
could pay out. In other words, required reserves did not assure the abilof a bank to honor its obligations on demand. Moreover, since part
these reserves was held on deposit with correspondent banks, their recall for meeting the demands of local depositors only transferred to the
correspondent banks the problem of raising cash to liquidate banking system liabilities. In fact, in deposit withdrawal emergencies, outlying
canks tended to rely on borrowing from their correspondent banks with whcm
they maintained deposits. But these banks could use only their excess
reserve^ for such lending, and the scattered excess reserves of the entire banking system were inadequate when a large number of banks were
facing unusually heavy depositor withdrawals.
an
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Gradually it became more clearly understood that the ultimate siaf ty
of bank deposits depended much more upon the availability of 8 reservo
of reserve funds, to be drawn upon in case of need, than upon l e g a l reserves. That is, what was needed was an institution to provide additional money and reserves in emergencies; and, more important, to provide additional means of payment, under appropriate regulatory safeguards in accordance with the growth of agriculture, industry and
commerce.
The Federal Reserve System was established primarily to meet thes
needs. The Reserve authorities were empowered to issue money. They
^
were also empowered to lend to member tanks or to buy United States uo
eminent securities or certain kinds of commercial paper in the open ma
ket, a process that creates member tank reserves in the form of niemter
bank deposits at the Reserve banks. It was provided that member oanKS
could not legally reduce their reserves below the statutory minimum a:
since excess reserves do not produce income, it was. expected that mem,
banks would not ordinarily keep excess reserves. The Federal R e s e r v e
System, through its discount and open market instruments, was g i v e n a
thority to exercise a regulatory influence over the volume of deposit
which member bank lending and investing activities could create.
These facts gave bank reserves and reserve requirements a new significance. Instead of serving largely as an individual bank's m a m
guaranty of readiness to honor its obligations, they became the means\ j
which the central banking authorities exert a restrictive or exp^sion^
influence, as public economic interest directs, on the ability of nan •
to extend credit and expand deposits.
Relationship of reserve requirements to the volume of deposits:
The two factors I have just mentioned—the volume of tank r e s e r v e s
and legal reserve requirements—serve as a team to set a limit to the
total volume of deposits at any time. I shall have more to say la er
about the volume of bank reserves. First, I should like to examine wi
you, as I have before, the present-day role and significance of can/ i
serve requirements—that is, the percentages of demand and time deposi
that banks are required to hold as reserves.
At existing levels of reserve requirements, one dollar of r e s e r v e s
will support over 6 dollars of bank deposits. Stated in another^way,
given addition to bank reserves makes possible about a six-fold
in bank deposits. A contraction in reserves of a given amount tends ^
produce a six-fold contraction of deposits.
The basic principle underlying this possible expansion and c o n t r a c tion is that tank deposits have their principal source in bank lending
and investing. If there were only one bank in the country and it we c
assume that peoole hold their money in the form of bank deposits, the
bank could expand its deposits indefinitely by making loans to its customers and crediting the proceeds of the loans to its customer c h e c k i n g
accounts. Being the only bank, it would not need to fear loss of depo>
its to other banks. Those who receive checks drawn on the bank w o u l d
deposit them at the bank,the effect w mid be merely a transfer of deposit ownership on the books. The only limitation on the expansion m
189?
deposits would arise out of the amount of reserves in proportion to its
deposits which the bank maintained, either because of its own rules or
because of legal reserve requirements. At the present time member bank
reserve requirements average about 15 per cent of total deposits. Fifteen per cent reserves permit deposits to expand about six and two-third
w.mes. Thus, if there were but one large commercial bank serving the ene
country and holding all the deposits of the people, its deposits
could expand to £666 for each additional $100 of reserves.
But we have not one bank but approximately M,000 commercial banks.
herefore, in the actual competitive situation that exists no bank can
expand its deposits by making by itself new loans and investments of six
aes
the amount of any newly acquired reserves. It can not do so bemuse bank customers do not borrow with the expectation of leaving the
borrowed funds on deposit; they borrow in order to spend, and the 'funds
'hey borrow are more apt to be checked out to another bank than to remain with the bank which lent them. Consider an illustration of how
credit and deposit expansion tends to occur, using an average reserve
requirement for all banks of 15 per cent. When a bank receives a deoosit
vlOO, it must put aside $15 as a reserve against the deposit and it
can lend $85. When it has done this it has both the $100 deposit and tte
W
deposit put to the account of the borrower. But this £85 will probably be transferred by a payment to a depositor of a second bank. The
second bank receiving the $85 deposit must increase its reserves by 15
Per cent of the deposit; that is $12.75. It then has $72.25 left which
it can lend and which will probably find its way through a payment to a
third bank.
1
This process may continue through a succession of banks, assuming a
demand for bank credit, until taking all the banks together a result is
reached which is the same as would be reached if there were only one
bank. That is, all banks taken together constitute a system comparable
£o a single bank performing all the banking business. Ceoosits may shift
om bank
to bank but, as a general thing, they do not leave the banking
system. So, the process of lending and moving funds from bank to bank
*ith resulting increases in deposits and in required reserves can continue
through a succession of banks until the total of the new deposits, counting the original deposit of $100 at the first bank and the deposits created through the successive loans and investments, will amount to $666.
ihe reserves set aside by the banks involved will total $100, which is
the 15 per cent required against the aggregate deposit of $666.
From this illustration we may draw two important generalizations.
First, the lower the percentage reserve requirements of banks are, the
greater the volume of credit and deposit expansion a given volume of additional reserves will support and the greater the volume of credit and
deposit contraction a given loss of reserves will tend to require. Second, with our system of H,000 independent banks, legal reserve requirements at some level are an essential element in the mechanism through
which the total volume of bank credit and deposits may be brought under
some over-all control.
Reserve requirements of the Federal Reserve Banks:
I believe it is helpful for a fuller understanding of the modern role
of commercial bank reserves to contrast the significance of commercial
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reserve requirements and the requirements in gold certificate reserves applicable to the Federal Reserve Banks. It needs to be recognized that as far as reserve requirements are concerned, .as in other re
soects, there are important differences between commercial banks and
Federal Reserve Banks. As we have seen, the principal p r e s e n t - d a y nine
tion of commercial bank reserves is as a mechanism through which tae
total amount of m o n e y in the country may be influenced. What is the
purpose or role of the reserve requirements imposed by law on the i'ea&
Reserve Banks?
bank
The reserve of 25 per cent against deposit and note
that
the Federal Reserve Banks are required to hold in gold certificates na&
importance in connection with two major kinds of functions performed uy
the Federal Reserve System. Such reserve requirements could, m a F ^
of vast credit expansion, restrain the System from expanding Reserve w
credit beyond a certain point. This would then tend to put an automata
limit, although sometimes a high one, on the total monetary and creai>
expansion that could take place. The System, however, does not expand i
credit irresponsibly; substantial increases in Reserve Bank credit have
been made only to meet national emergencies of depression and war. moi
over, if the System were disposed to act in an irresponsible way to expand credit in a period of inflation, it has now more than enough leeway
of excess reserves to cause very serious damage before its reserve lim
would even begin to be effective.
l i a b i l i t i e s
While the limit on the expansion of Federal Reserve credit which i9
set by the gold reserve requirement is not an effective or necessary device for curbing monetary expansion, it may at some stage hincer tie ie
era! Reserve in meeting a financial emergency. The System is the agency
responsible for assuring the convertibility of bank deposits (and today
perhaps I should also add Savings Bonds) into currency, should anything
cause the peoole to want to hold currency rather than bank deposits or
these other licuid .assets. The System also is responsible for providing
needed elasticity in the supoly of available bank reserves. Tne r e s e r v e
requirements on the Reserve Banks serve to limit their capacity to perform these functions. It seems to me that under the kind of a monetary
and banking system we now have, there is no reason for any mechanical
limitation on the capacity of the Federal Reserve to insure t h e c o n v e r t !
bility of bank deposits into currency or to extend needed credit „o meiber banks.
influence over the volume of bank reserves:
As I pointed out earlier, two factors limit t h e volume of d e p o s i t s
that banks may create and hold: the volume of bank reserves, ana the 10
serve requirements of banks. When the volume of bank reserves i n c r e a s e s ,
banks as a group may expand their deposits by a multiple amount; conversely, a loss of reserves tends to induce a multiple contraction oi
deposits. Thus if the Federal Reserve can influence the volume of b a n k
reserves it can restrain or promote the expansion of bank deposits and
help to bring about their proper adjustment to the needs of the economy.
There are three principal instruments which the Federal Reserve System may employ to alter the volume of bank reserves. One means of control has been through changes in Reserve Bank rediscount rates. When a
191?
aember bank has lent or invested all of its available funds, it may obtain additional reserves by rediscounting or borrowing at its Federal
serve Bank. Although when a member bank applies for such accommodation
l© Keserve Bank is under no obligation to grant credit, a member bank
icv p l s f a c t o r y collateral can usually obtain it. Federal Keserve pol/ of encouraging or discouraging borrowing by member banks is expressed
Principally not in the granting or refusing of loans but in the rate
th f g e + !°r ^discounts and advances. Vhen the Federal Reserve believes
at it is in the public interest to encourage credit expansion, it tra^lonally sets its rediscount rate low in relation to prevailing market
8,
x W h e n 111
iscount rate.
dio!
Q
wishes to
discourage credit expansion, it raises the re-
spr B ^ n k S j a n d t h e en tire money market as well, also have access to ReeithG m n k ° r e d i t t h r o u S h federal Reserve buying of bills. These may be
er Tr
pr : q , . easury bills or bankers' acceptances, but the latter while of
eno
J m p o r t a n c e ^ the 'twenties are not widely used today. The influce ot the System over the extent of such access to Reserve Bank credit
/traditionally made effective by raising or lowering interest yields or
Rel!+- -, Which t h e F e d e r a l ^serve will purchase these market instruments,
1 W
spit m
federal Reserve buying rates encourage the money market to
t 0 t h e S stem
avp
V
> h i S h rates discourage such sales. The bill
6 haS been
and+
traditionally the cheapest way to Federal Reserve credit,
men+ • t h e Tre a3ury bill is playing an important role in the adjustbani l n reserve positions made by banks, particularly the money market
m a r w . R e c e n t a c t i o n s taken by the System to increase the flexibility of
?iv + u l n t e r e S t r a t e S t o a d J u s t t o changing credit situations may tend to
« e the bill instrument an even more pivotal role in the credit mechanism.
both the
Fed
rediscount instrument and the bill buying mechanism the
aeral Reserve operates essentially passively to influence the volume of
cnK reserves. That is, having set for the time its rediscount and bill
mon 8 r a t e s > t h e Astern traditionally awaits the action of banks and the
^ney market in general to seek out Federal Reserve credit. The Federal
serve has an active instrument of control over the volume of bank reovn V e S . i n i t S ° p e n m a r k e t policy. That is, it can enter the market at its
n initiative to sell Government securities to contract Reserve Bank
edit and to buy Government securities to expand that credit. Bank rerves may thus be contracted or expanded by the System as it seems in the
Public interest to do so.
^gderal Reserve authority to change member bank reserve
^gguirements:
— —
^
As you know, the Board of Governors has the power to vary the reserve
quirements of member banks. The basic requirements established by law
ain
st demand deposits are 13, 10, and 7 per cent for central reserve
c|
reserve
bv
city, and country banks, respectively. These may be raised
B a r d t o a m a x i m u i n o f 26
°
>
and H per cent, respectively. ReS L
ve requirements on time deposits at all member banks may range from 3
infi°+nt t 0 6 p e r C e n t * I n A u S u s t > last year, Congress, as an antination measure, gave the Board temporary authority to impose additional
serve requirements on member banks up to A per cent on demand deposits
Per Cent
at+h
° n t i m e deposits. Under this authority, which expired
e n d o f June
,
> the Board raised reserve requirements last September,
lowered them in May and June.
192?
The instrument of changes in reserve requirements is not one tha
well adapted to frecment use for influencing the total volume ot bank
credit and bank deposits. It is instead a measure to be used
' f
to time as needed for contracting or expanding the. liquidity position
the banking system and for bringing the other credit control instrume.
of the Federal Reserve into broad contact with the credit situation,
the period of financial reconversion from war through which we have n
largely passed, however, changes in bank reserve reouirements assumea
ceptional importance as an instrument for credit and inflation contro .
This was the case because the System's other instruments for influence
the total volume of money and credit were severely limited in use d/
special circumstances arising out of the financing of the war and tne
absence of real oeace after the war. Recent developments, which X sn
discuss shortly, indicate that perhaps greater emphasis may now saie j
be placed on other monetary instruments and that the instrument otcna
in reserve requirements may play a more balanced role in the tuture.
Recent Federal Reserve Credit Action:
A year ago, when I discussed the subject of bank reserves at a
seminar session of this School of Banking, circumstances were such tna
these Federal Reserve instruments for affecting the volume o, bank re
serves were very severely limited in their usefulness. At that time,
with financial transition to peace-time conditions only Partially aco
plished and with the international situation es it was, stability in
Government securities market was an overriding consideration. Open m
ket operations, therefore, were not then usable for the purpose ot ax
fecting aggressively the volume of bank reserves. For exercising som.
measure of restraint on monetary expansion over the period ^ postwar
flation, monetary authorities were obliged to rely on use of the then
substantial Treasury cash surplus, cn a modest rise m short-term r*te
and on increases in reserve requirements.
By the end of last June circumstances were such that the Federal
Open Market Committee was able to announce a change in policy vlucn w
help to restore the effectiveness of certain traditional instruments i ^
influencing the volume of bank reserves. Purchases, sales, and excnar^
of Government securities are now made with primary regard to the
business and credit situation. The policy of maintenance ot a
^
fixed pattern of rates has been discontinued, although it "ill
to be the System's policy to maintain orderly conditions in the Govern
ment security market, and the confidence of investors m Government conAbout the time the change in open market policy was announced, ex
cess reserves of member banks were expanded approximately SOOmiiiioi
lars by the expiration of the special reserve requirementauthority i
Congress granted to the Board a year ago. These tree funds, seeking!
vestment, pressed down the market yields on all Government ^ l ^ l l l d B
but particularly short-term interest rates. After the short-term g e l
had declined about \/U of 1 per cent it became clear that these rates
were under such pressure that further precipitous declines w e r e likeiy,
and the System made short-term Government securities, largely bills,
available from its portfolio in order to avoid a disorderly market
situation.
193?
In early August the Board announced further reductions in reserve
requirements, and over August and early September these reductions are
waking available to member banks an additional 1,800 million dollars of
excess reserves. Short-term Government securities, again primarily bills,
being supplied in the market from the System portfolio so that banks
way find a t least temporary investment for these funds without pressing
down short-term yields to an undue extent.
Generally speaking, the Board's reserve requirement actions coupled
ith the change in open market policy of the System have had two major
effects that should help to promote the availability of bank credit at
this time. Member bank liquidity positions—that is, their holdings of
cash, excess reserves, and short-term Government securities—have been
expanded by about 2,600 million dollars. At the same time the yields on
short-term Government securities are down considerably from what they
w
ere in the early summer, and accordingly the attractiveness of these investments is much reduced as compared with say a loan to a business concern or to a farmer. I should also mention the fact that the Reserve
System is no longer freely selling Government bonds to keep their yields
from declining. With the adoption of this policy by the System, pressure
ef market forces brought about a decline in yields on medium, and longterm Government securities, with an accompanying tendency for investors
to seek corporate and municipal securities as outlets for the funds they
have available for investment. I believe that these credit actions by
the Federal Reserve have had some influence in making the current economic
situation somewhat more favorable than in general it promised to be a
few months ago.
y
How_should the burden of holding reserves be distributed
gmong banks?
In order to keep the volume of money in the country at a level which
is appropriate to economic conditions, we have seen that under our banksystem it is essential that banks be required to hold reserves, and
that the Federal Reserve be able to influence the volume of reserves available to banks. At any given time, there is an appropriate volume of total
reserves that banks as a group need to hold to promote monetary stability.
But bank reserves are immobilized assets that cannot be loaned or invested
to earn an income. The required reserves which an individual bank holds
represent, therefore, a contribution which the bank makes to effective
Rational monetary policy. The basis or principle for allocating the total
burden of holding required reserves as among different banks thus becomes
extremely important.
The Federal Reserve System has studied the problem of allocating the
reserve burden among banks for a long time. As you all doubtless know,
the existing statutory basis for member bank reserve requirements dates
back to the establishment of the National Banking System over 85 years
a
go. The requirements are related to the geographic location of the bank.
That is, a bank's classification for reserve requirement purposes depends
°n whether it is located in a central reserve city or in a reserve city,
°r whether it is outside of these cities—a so-called country bank. A
member bank, located for example in a reserve city must under this scheme
bold reserves at the higher percentages designated for such a center
whether or not it is doing a reserve banking type of business. Another
8?
member bank doing a reserve banking business but located outside tner
serve city areas need hold only country bank reserve requirements. *ro
time to time the Federal Reserve has been able to relieve s o m e banks in
reserve cities of a discriminatory reserve burden through its limited
discretionary authority relating to outlying areas of re;
many cases of ineauity cannot be solved in this way and a basic problem
of equitv 0 ? reserve requirement treatment as among member banks st,m
remains.
There is also a fundamental problem of equity as between m e m b e r ^
nonmember banks, where the differences in treatment are frequ<antly very,
very wide. Certainly from the standpoint of the reserves it must hold,
the average nonmember bank is now making a disproportionately small ca
tribution to monetary stability. The nonmember bank not on:iy is subje
generally to much lower reserve requirements, bub it is also permittea
hold its reserves at correspondent city banks where they serve a d o u W < ^
purpose—both as legal reserves and as a needed correspondent balance,
member bank holds both a reserve balance in its
with its correspondents. Further, the actual contrilbution to inonet.*ry
control of a reserve balance held with a c o r r e s p o n d e n t bank is only equ
to that fraction of the balance which the correspondent ban.c .s m turr
obliged to hold with its Reserve Bank, since the c o r r e s p o n d e n t bank
free to, and usually does, invest or lend the remainder
In some stated
moreover, nonmember banks are permitted to invest a portion of their r
serves in interest bearing public securities.
treafcmet,
in favor of nonmember banks as far as reserve requirements are c o n c e r n * *
tends to weaken the ability of the Federal Reserve to promote P^per ad
iustraent of the volume of money to the needs of the economy. The large
difference in the requirements tends to discourage banks from joining *
System! and could result in weakening the System
withdraw from membership. It is difficult to see the justification for
discrimination of this kind.
D i s c r i m i n a t o r y
Uniform Reserve_Plan:
• As I said a year ago at this School of Banking, a staff committee
of the Federal Reserve System has developed a plan for rationalizing
existing practices for distributing the reserve requirement buruen among
banks. They have called the plan the Uniform Reserve Requirement plan,
anS a; the request of the Joint Committee on Economic Report o f C o n g r e s s
they presented to that Committee the results of their study. The suggestions of the Federal Reserve staff group are in the discussion;stage
and have no official status in the System. I find the ideas in the plan
very interesting, however, and I should like to tell you something about
them. The plan deals only with member bank reserve
J^ed
it is adopted it could be, and I believe certainly should be, e x t e n d e d
with appropriate modifications to cover all commercial banks.
The Uniform Reserve Requirement plan consists of five basic points.
These have been described by the chairman of the staff committee tnat
developed the plan as follows:
First, the plan would abolish central reserve city and r e s e r v e city
designations of banks. In other words, the geographical basis ior the
fs efsment of reserve requirements would be dropped as too i n e q u i t a b l e aS
among banks which are doing various kinds of commercial banking business
195?
. T3le second point of the plan is that, for purposes of reserve requirements, deposits would be classified into interbank deposits, other
aemand deposits, and time deposits. Many a theoretical hair has been
s
Plit in disputes over the classification of deposits. The compelling
practical objection to treating all deposits alike is that, depending on
e
level set, starting such a system would create enormous excess reserves in central reserve city banks, enormous deficiencies in non-reserve
city banks, or both. The compelling practical objection to a full system
deposit classification is that it would be impossible to administer,
since any classification of deposits is somewhat arbitrary. Advantages
given for the proposed classification are that, by and large, the three
classes of deposits are used for different purposes, are readily identifiable, have traditionally been treated differently, and differential
treatment would minimize initial disturbances while yet retaining effective over-all control. The staff committee recommended that initial
requirements be established at 30 per cent against all interbank deposits,
u
per cent against other demand deposits, and 6 per cent against time
eposits, which would have left the total volume of reauired reserves at
about the level existing at the time. (Slightly lower requirements would
a
PPropriate of course should the plan be adopted now.)
The third point of the plan is that the Federal Reserve should be
given authority to change the requirements within limits established in
he law, We have already discussed the use of changes in reserve requirements from time to time in order to help prevent injurious credit expansion or contraction. This is a modem instrument of central banking
Policy which is discussed with approval in virtually every textbook on
money and banking.
As a fourth point, banks would be allowed to count vault cash as
Part of their legal reserve. The role of vault cash in the banking system has changed fundamentally in the past half century. Before the Federal Reserve System was established, vault cash was the ultimate reserve
cf the banking system, since it alone was available to meet cash withdrawals. The Federal Reserve Banks, however, are authorized to create
additional reserves or cash when needed. The use of vault cash as reserves would not impair the System's influence over the volume of bank
credit, provided initial requirements are established at appropriate
levels to offset the change. From the point of view of credit control,
here need be no concern as to the form of Federal Reserve Bank liability—
^hether it be Federal Reserve notes or reserve deposits—that a member
cank prefers to hold a3 reserves. The transition to the new system of
reserve requirements would be facilitated by permitting banks to count
vault cash as legal reserves. Establishment of the suggested uniform requirement against other demand deoosits would increase required reserves
oi
- country banks. Since, however, such banks hold relatively larger
amounts of vault cash the increase in their total requirements would be
offset in part by permitting them to count vault cash as legal reserves.
The fifth and last point is to permit a bank to count as reserves
that portion of its balances held at other banks which those banks, in
turn, are required to hold as reserves against such balances. The relationship between correspondent balances and reserves is a problem with a
io
ng history. After many discussions the staff concluded that correspondent ^balances ought to be related to reserves in such a way that (a) a
shift of funds by member banks into or out of "due from banks" would not
196?
the total volume of excess reserves in the system as a w h o l e ,
(b) "reserve credit" would be allowed for precisely the portion oi au
from banks" that is on deoosit with Federal. Reserve B a n k s (by way oi
reserve requirement imposed on deposits due to banks); and {o) corr
spondent bank relationships and interbank balances would b e r e c o g n - e
as an established part of our banking system. The fifth p o i n t is a e
signed to accomplish this result. So long as the rate at which the
"country" bank or the reserve city bank is allowed reserve credit 101
its "due from" balances is equal to the rate at which depositary ban**
are required to maintain reserves on interbank deposits, a given res
w i l l support the same volume of nonbank deposits irrespective of whe^
the owner-bank keeps all of its reserve with its Federal Reserve Bun*,
or keeps a portion of it on deposit with a correspondent and thereioi
indirectly with a Federal Reserve Bank. In either case, only vault
and balances which are directly or indirectly on deposit with federal
Reserve Banks would constitute legal reserves.
affect
The analysis of the Uniform Reserve Plan may be summarized as
follows:
Reserve retirements are an essential feature of the mechanism J *
which the volume of money and credit is adjusted to the needs of tne
economy but the present system of reserve requirements is freauent y
equitable; required reserves of many banks are higher or lower than u
of other banks doing a similar business simply because of the classi
cation of the communities in which they are located. The uniform sys ^
of reserve requirements would require all member banks, or Prefeia^./
commercial banks, regardless of location, to maintain the same perc®
ages of reserves against each of the three major classes of deposits
interbank deposits, other demand deposits, and time deposits. BanKS
whose business requires the holding of disproportionately large emom
of vault cash would no longer be penalized by being required to ^ ^
the same reserves in Federal Reserve Banks as other banks doing a av
lar type and volume of business but whose cash requirements vcro
Changes in the total volume of interbank deposits would no longer
the volume of other deposits of member banks that could b e s u p p o r t e d
a piven volume of reserves. City banks would have to maintain large
^
reserves than now against balances due to country correspondents, t w
latter would be given corresponding credits for such balances a g a i n e
their reouired reserves. The uniform system would increase tne requ
reserves for some banks and lower them for others, but the changes v
be reasonable and in the direction of greater equity.
@FedFRASER