Thomas Tooke

The Fed encouraging un-reserved banking from the Start (1913-1919 account).

In Unreserved Banking on April 26, 2012 at 2:01 am

Kemmerer writes the following in his books in 1920:
[…]

State banks and trust companies entering the federal reserve system have generally experienced substantial reductions in legal requirements so far as actual cash reserves are concerned.  The reduction of legal reserve requirements was a statutory recognition of the fact that smaller cash reserves are needed under a banking system possessing a group of central banks of issue and rediscount than are needed under a highly decentralized system of banks like our American banking system prior to the federal reserve act. It was perfectly proper that with the establishment of the federal reserve system the legal reserve requirements of the banks should be reduced. Whether the reduction was too great or not, only experience will tell. […]

Well I let the readers make their own opinion about that. Kemmerer continues.

[…]

In the writer´s judgment the reduction was excessive, and it was a mistake to discontinue all-cash-in-vault legal reserve requirements of member banks. The important fact however, to note is, that the reduction of reserve is taking place at just the time when the country was being flooded with gold from the belligerent countries of Europe created the possibility of a tremendous loan and deposit expansion. This potential expansion was quickly turned into an actual expansion under the pressure of four important forces.

In fact from August 1st, 1914 to April 1917 (practically the period of the war prior to our entrance as a belligerent), our net importations of gold amounted to $1,109 millions and this enormous increase in our supply we maintained throughout the remainder of the war. We have most of it to this day, although there have been substantial losses since the armistice.

There four forces  were:

(1) the natural desire of bankers and business men for profit

(2) the patriotic impulses of bankers and business men to render the nation the best possible service in its time of emergency

(3) the desire of the Government to finance itself with the minimum disturbance to legitimate busines

(4) the desire of the Government to float its securities in large volume at the minimum possible rate of interest.

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