Thomas Tooke

Reserve requirements reduction during 1913-1919. The Federal un-reserved system.

In Unreserved Banking on April 25, 2012 at 3:02 am

As Kemmener writes in March 1920:

[…]

The period of 1913 to 1919 was a period in which the country´s legal reserve requirements for bank deposits were enormously reduced. In 1913 national banks in central reserve cities, namely, New York, Chicago and St Louis, were required to keep on hand cash reserves equivalent to 25 per cent of their deposits, both demand deposits and time deposits. National banks in the 47 reserve cities were also required to maintain reserves of 25% per cent, but one-half of this could be maintain as an ordinary deposit with a national bank in a central reserve city. Other national banks, so called “country banks” were required to maintain against deposits reserves of 15 per cent of which three-fifths could be held as an ordinary deposit with a national bank in a reserve city or a central reserve city. For all banks the 5 per cent cash redemption bank notes was counted as part of the legal reserves against deposits.

At the present time (1920) all legal reserves of national banks consist of deposits with federal reserve banks consist of deposits with federal reserve banks against which deposits the federal reserve banks are required to maintain only 35 per cent lawful money reserve. Time deposits, namely deposits after notice of 30 days, which constitute about one-fourth of the total individual deposits of national banks, since 1913 have been treated separately as regards legal reserves and in all national banks are now subject to a reserve requirement of only 3 per cent. The 5 per cent bank note redemption fund can not longer be counted as legal reserve against deposits. Against demand deposits the present legal reserve requirement is 13 per cent for banks in central reserve cities, 10 per cent in reserve cities, and 7 per cent for banks in other cities.

An idea of the extent of the reductions in legal reserves of national banks since 1913 can be obtained by assuming three national banks, each having $1,200,000 demand deposits, $300,000 of times deposits, and $100,000 of national bank notes outstanding, one bank being in central reserve city, on in a reserve city, and one in a “country bank” city, and asking ourselves what ultimate legal cash reserves would have been held against theses deposits in 1913 and 1920 respectively. The answer is given in the following table.

[…]

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